Rapidly rising interest rates have some borrowers contemplating whether to sell out of their share holdings and put the money into their home loan instead.

We spoke with some industry experts to find out if it's a good idea. Here's what to consider before you decide.

Shares or Mortgage


After sharp interest rate hikes and a tough year for shares, Morningstar senior investment specialist Shani Jayamanne can understand why some investors would be thinking of selling out of equities to reduce their home loan and repayments.

"People think about the interest that they can save on their mortgage, but often do not think about the compounding of returns on their equities," Ms Jayamanne says.

property or shares

She says one of the many things to consider is whether you stand to make a profit from selling your share portfolio. If so, you'll have to pay capital gains tax at tax time.

"After selling lump sums, this could be thousands of dollars unaccounted for that can add undue stress on your finances," she says. 

Ultimately, the answer comes down to personal circumstances.

Comparison 1: Lump sum

Take the example of someone who keeps a $100,000 investment in shares over the long term versus putting that amount into a mortgage offset account.

Morningstar's portfolio projection tool - available to Investor subscribers - calculates the investment will grow to more than $338,000 with a 5% return over 25 years.

Whereas placing $100,000 into the offset account of an $800,000 mortgage with 25 years outstanding would reduce the total interest bill by just over $200,000, according to NAB's home loan offset calculator. It would also shave 5.5 years off the life of the loan. This calculation assumes a 5% interest rate and does not factor in loan fees and charges. 

Even with that shorter, 20-year time horizon, the share portfolio will grow to $265,000. By 30 years, it will have reached more than $430,000. These calculations do not consider income tax and capital gains tax on the investment.

Comparison 2: Regular contributions

Instead of a one-off lump sum, Ms Jayamanne says investors can still substantially reduce the interest bill on their home loan by making smaller, regular contributions on top of their minimum repayments. 

She crunched the numbers for someone considering putting extra cash into their mortgage against the return on an equity investment.

A borrower with an $800,000 mortgage can expect to pay $797,000 in interest over a 30-year loan, the Australian Securities and Investments Commission's (ASIC) Moneysmart mortgage calculator shows, using the average owner-occupier variable rate of 5.29%, according to RBA November figures.

An extra $500 a month reduces the interest cost by $190,000 and the loan term by more than six years.

Morningstar Investor's portfolio projection tool shows investing $500 a month in equities over 30 years (at a 5.29% rate of return) results in a $260,000 return - and $440,000 total future value.

These calculations do not consider taxes and fees on the investment and mortgage fees.

Taking a long-term approach


Ms Jayamanne says the key to successful investing is to take a long-term approach with consistent additional investments and reinvestment of income - not selling in and out of assets when you need to allocate funds elsewhere.

"Compounding has been called out as a key contributor to Warren Buffett’s success – allowing his returns to earn a return, and snowball over longer periods," she says.

"Not only do your investments compound, but you save on capital gains tax from consistently selling in and out of investments."

Faced with sharemarket volatility plus rising mortgage and living costs, some equity investors may be weighing up reducing the risk of further losses against a guaranteed saving of interest on a home loan, or a guaranteed return of 3-4% on a savings account.

Selling means you lock in losses and do not give assets a chance to recover, Ms Jayamanne adds.

"Now is a good time to review your finances holistically instead of finding band-aid solutions and understand how costs can be reduced to create a larger buffer," she says.

"There may be other ways to reduce costs outside of selling investments."

Tips to reduce mortgage repayments


Investors don't need to take drastic action - like selling down their share portfolios - to significantly reduce their mortgage interest bill. 

Refinancing, changing the frequency of your repayments, and using an offset account or redraw facility can make a huge difference over the life of the loan. 

Analysis from comparison site RateCity estimates someone with a $500,000 debt and 25 years remaining on their home loan could potentially save almost $20,000 in the next three years by refinancing from a variable rate of 5.86% to one of the lowest on offer at 4.5%.

Someone with a $1 million loan could save almost $40,000 in the next three years.

RateCity research director Sally Tindall told Morningstar anyone struggling financially should look at all available options.

"One option might be to sell other assets such as shares to help reduce the size of your mortgage, but there could be other options a person might want to consider before selling up," Ms Tindall says.

1. Refinance to a lower rate

Mortgage refinancing has reached record highs as borrowers seek lower interest rates after the Reserve Bank of Australia's eight consecutive cash rate hikes, totalling 300 basis points.

"Refinancing can save you thousands if not tens of thousands of dollars over a reasonably short period of time," Ms Tindall says.

She says those who don’t want to switch lenders should still haggle for a more competitive rate.

While many lenders are offering cashback deals to refinancers, Ms Tindall says opting for a low competitive rate can often save you more in the longer term.

2. Use an offset account of redraw facility

"Using a redraw facility or an offset account is a great way to try and minimise the amount of interest you pay back to the bank," Tindall says.

"You can put your salary in an offset account and use the money as you need it, but still be reducing your overall interest bill every single day that you have that spare cash in there."

She says most home loans have a redraw facility that allows borrowers to withdraw any extra repayments they've made, although some charge a fee. Loans with offset accounts can also come with higher rates or fees.

3. Switch from monthly to fortnightly repayments

Paying half the monthly amount every fortnight means you are effectively making an extra month's repayment a year.

Not only can paying fortnightly reduce your interest bill, it can shave more than four years off the loan term.

4. Switch to interest-only payments or extend loan term

Tindall says options like interest-only or a longer term will reduce your repayments, but both should be one of the last resorts.

"It's really going to add thousands if not tens of thousands on the total cost of your mortgage over the longer term."