This may shock you, but a large group of Australians have more money today than before the pandemic.

Banks fell in line with the Reserve Bank and cut mortgage rates to record lows, and lockdowns and border closures forced many of us to save more than we normally do.

In fact, Treasury figures show households squirrelled away an extra $113 billion into their savings accounts between March and November last year.

Couple that with the extra interest in sharemarkets triggered by the GameStop saga, and many Australians will be wondering whether now is the right time to invest, or whether they should get ahead on their mortgage.

So, which one makes more sense?

Low rates make shares more attractive

Beyond Today Financial Planning director Antoinette Mullins said investing in shares might offer “better value” than increasing one’s mortgage repayments now that rates are so low (though she noted it would depend on the person’s individual circumstances).

This is because your money should generate larger returns in shares than it would save you in monthly mortgage repayments.

Why?

It all comes down to interest rates. If shares are delivering higher annualised returns than your lender is charging you in interest, then it makes sense to invest in shares.

And although past performance is no guarantee of future results, it’s worth noting that the Australian sharemarket delivered an annualised return of 6.8 per cent between 1900 and 2020, making it the world’s top-performing sharemarket over that 120-year period.

Higher returns come with greater risks

It should come as no surprise to learn, though, that investing in shares is a risky endeavour, particularly if you attempt to time the market rather than invest over time.

The corporate regulator, ASIC, offers plenty of useful information on sharemarket investing on its website, moneysmart.gov.au.

It says shares are “high” risk investments, property is “medium to high” risk, and savings accounts and fixed-interest investments, such as government bonds and corporate bonds, are “low risk”.

Centaur Financial Services adviser Hugh Robertson said this is why it would make sense for “a conservative investor” to take advantage of record-low interest rates to get ahead on their mortgage.

Doing so would provide them with peace of mind, he said.

“And because interest rates are so low now, when you’re putting in your extra repayments, you’re paying off just straight principal,” Mr Robertson told The New Daily.

This means that when interest rates eventually rise again, you will be paying interest on a lesser amount.

Australians have saved record amounts during the pandemic.

Investment timeframes and goals are crucial

As with all investments, the right option for you depends on your goals, risk appetite, and investment timeframe.

Moneysmart suggests that people only invest in shares if they have an investment timeframe of at least five years, as shares tend to deliver volatile returns over the short term.

This means that if you’re saving for a short-term goal like a holiday, it’s best to keep your money in a high-interest savings account that you can easily access, as there’s no risk of losing your money.

The Australian sharemarket is almost back to where it was before the pandemic.

There’s room to do both

Alternatively, Ms Mullins said home owners could invest in high-yielding shares – either through a lump sum or monthly contributions – and use the dividends to pay off their mortgage.

“So, you’re essentially doing both,” she said.

Another option would be to focus on paying off the mortgage in the first instance so that you can draw down equity – through a line of credit loan – to invest in shares down the track.

Mr Robertson said this was a complex but attractive option, as unlike with regular mortgage repayments (“bad debt”), home owners could receive tax deductions on the amount borrowed to invest in shares (“good debt”).

“So, if I just pay off my home loan, that’s nice. If I just invest, that’s nice. But a more optimal strategy is to pay down my home loan then redraw that to invest,” he said.

“You pay down bad debt and pick up some good debt – rather than just putting it straight into the investment and getting no tax benefits.”

Mr Robertson said any dividends earned through the shares could then be paid back into the mortgage, giving home owners more space to draw down on equity and invest in more shares.