You've just inherited a significant sum of money. Whether you expected it or not, you're now sitting with a decision that could shape your long-term finances.
A 2024 report by wealth manager JB Were found that the average inheritance in Australia was $706,806. Melbourne University’s Household, Income and Labour Dynamics in Australia (HILDA) survey found the bulk of people inheriting money were older than 25, with the largest portion being 55 and over.
An inheritance is a chance to make a smart financial move that improves long-term security, creates more options and helps build wealth for the next stage of life. The question is, do you use it to reduce debt, or do you use it to build wealth?
There is no one-size-fits-all answer. The right move depends on your income, your mortgage, your risk appetite and what you want your money to do for you. But if you are trying to decide, it helps to think about the choice in a practical way.
Option 1: Pay off your home loan
For a lot of people, this feels like the safer option. And in many cases, it is. Paying down your home loan can deliver an immediate, guaranteed benefit. Every dollar you put into the mortgage reduces the balance on which interest is charged. In a higher-rate environment, that can translate into meaningful savings over time.
There is also the cash flow argument. Changes in mortgage rates directly affect household cash flow, which is one reason many borrowers value lower debt levels so highly. A large lump-sum reduction in your loan principal can meaningfully reduce your monthly obligations.
There is also the emotional side. A smaller mortgage often means less stress, more monthly breathing room and a greater sense of financial control.
Using an inheritance to reduce your home loan may make sense if:
- Your current repayments feel too high
- You want more monthly cash flow
- You value certainty over growth
- You are approaching retirement and want less debt
- You already have plenty of exposure to property through your family home
That said, paying down the home loan has an opportunity cost. Once the money is in the family home, it may be harder to access again without refinancing or setting up another lending structure. It can improve your balance sheet, but it may not do much to grow your asset base.
Option 2: Buy an investment property
The other option is to use the inheritance as a springboard into investing. For many established borrowers, an inheritance can provide the deposit, stamp duty and buffer needed to buy an investment property without putting pressure on day-to-day cash flow.
The case for investing is straightforward. Instead of using the inheritance to reduce debt on a non-income-producing asset, you use it to acquire an asset that may generate rental income and grow in value over time.
Let’s look at some real numbers. According to Cotality data, Melbourne dwelling values rose 4.7% over the 12 months to February 2026 to a current median of $826,132. In dollar terms, that is an increase of about $37,000 in a year.
Then there is also the income side to consider. Melbourne’s gross rental yield was 3.7% in February 2026, which is the annual rent a property earns expressed as a percentage of its value, before expenses such as rates, insurance, maintenance and agent fees are taken into account. On a property worth $826,132, a 3.7% gross rental yield would equate to about $30,567 in annual rent before costs.
Cotality also puts Melbourne’s total return at 8.3%. That figure combines both rental income and capital growth. In other words, it reflects the overall return an investor may have received over the year from both the rise in the property’s value and the rent it generated.
Property investors may also be able to claim certain deductions associated with holding a rental property.
That said, an investment property is not automatically the better option just because you have extra capital. The numbers still need to stack up. You need to consider:
- The likely rental income
- Ongoing costs such as rates, insurance, maintenance and agent fees
- Your borrowing capacity
- Your tax position
- The quality of the suburb and property type
- Whether you can comfortably hold the property if rates stay higher for longer
This is especially important in Melbourne, where performance can vary significantly between suburbs and property types. A good investment decision is not about buying any property. It is about buying the right property, with the right loan structure, for the right reason.
Which option is better?
Before deciding, it is worth sitting down with a good mortgage broker and working through a few fundamentals.
Ask yourself:
1. How much do you owe, and at what rate? If your remaining loan is modest and your rate is variable, the maths for investing may stack up well. If you are carrying a large balance at a high rate, reducing that debt might suit you better.
2. What is your borrowing capacity? If you intend to buy an investment property, your broker needs to assess what the banks will lend you in the current environment, taking into account your existing mortgage, your income and any other commitments.
3. What is your tax position? Negative gearing can benefit high-income earners more than anyone else. A conversation with your accountant alongside your broker will clarify what a new investment property would actually cost you after tax, and what it could save you.
4. What is your risk tolerance? Property is not liquid. If you buy an investment property and your circumstances change, you cannot sell half a house.
Ultimately, you need to establish what outcome you are trying to achieve. If your priority is simplicity, lower stress and stronger household cash flow, reducing your mortgage may be the better fit. If your priority is long-term wealth creation, and you have the income and borrowing power to support another property, investing could be the stronger move.
For some households, the best answer is a combination of both. You might use part of the inheritance to reduce your non-deductible home loan, while keeping enough aside for a deposit or future investment strategy. Or you might place the funds in an offset account first, giving yourself flexibility while you weigh up the next move.
That middle ground can be particularly useful if you want to reduce interest now without locking yourself into a decision too quickly.
Get the right advice before you decide
Receiving an inheritance can be a life-changing event, but deciding what to do with it can be stressful and time-consuming. Paying down your home loan may give you more peace of mind, lower monthly repayments and greater financial breathing room. Buying an investment property may help you grow your wealth over time through rental income and capital growth.
An experienced mortgage brokerage like AXTON Finance can help you work through the numbers before you commit to anything. That means looking at your current loan structure, assessing your borrowing capacity and modelling what each option actually costs – and returns – given your income, your tax position and your goals.
Further, surrounding yourself with a team of trusted advisors with specialist skills in accounting, financial planning, property management and advocacy can improve your long-term outcomes. Fortunately, AXTON Finance enjoys an extensive network of trusted professionals we can introduce you to to get the best advice suited to your needs - ask us today.
If you have recently received an inheritance and want to understand your options, the team at AXTON Finance can help. Call 03 9939 7576, email getabetterrate@axtonfinance.com.au or get in touch today.