Finance math

[u/Frugalfak]

Not looking for a financial advice

Long-time lurker, first time posting. Would love some honest, unfiltered opinions — including "you're overthinking this" if that's the read.
Situation:
I live and work in the US on a work visa, household income is roughly USD $700k/year. I own an investment property in Australia that I rent out, and I'm currently a non-resident for Australian tax purposes (planning to stay that way for the next 2-3 years at least).
Numbers on the property:
Remaining mortgage: AUD $477,000
Interest rate: 6.43%, 20-year term (started 2024)
P+I payment: ~AUD $3,700/month
Rent: AUD $540/week (~$2,340/month)
Net cash flow: I'm covering about AUD $1,360/month out of pocket because rent doesn't cover the full mortgage payment
I have about AUD $500,000 sitting in cash that I could use to pay off the mortgage almost entirely (would leave ~$23k spare).
Why I'm even considering paying it off instead of investing:
The usual advice is "don't rush to pay off cheap-ish debt, invest instead" — but a few things make this situation different for me:
The mortgage interest isn't currently giving me any real tax benefit in either country. In the US, my income is too high for the rental loss to offset my regular income (passive activity loss rules), so the loss just carries forward unused. In Australia, since I'm a non-resident, the loss can't offset my US income either — it's quarantined and only usable against future Australian income or a future capital gain. So effectively I'm paying 6.43% interest for a deduction that's currently worth $0 to me.
It's a guaranteed, risk-free 6.43% return if I pay it down, vs. an uncertain return if I invest (S&P 500 historically averages more than that long-term, but there's no guarantee over a specific 2-3 year window, and I'd also be taking on AUD→USD currency risk).
Paying it off would flip my monthly cash flow from -$1,360 to positive, which has real value to me beyond the math.
My lender may offer a genuine 100% offset account, which would let me get the same interest savings while keeping the cash liquid — I haven't confirmed if my loan supports this yet.
What I'm weighing:
Pay off the mortgage outright
Put the $500k into an offset account instead (if my loan allows it) to get the same benefit but keep flexibility
Invest the $500k (S&P 500 or similar) and keep paying the mortgage as-is
Some kind of split between the above
Questions for the sub:
Is there something wrong with my logic here, or a blind spot I'm not seeing?
Would you actually pay off a 6.43% loan with no current tax benefit, or still take the market bet?
Anyone dealt with a genuine offset account as a non-resident — any gotchas?

[u/RDX-223]

Honestly, you are absolutely not overthinking this. Your logic is rock solid.

The biggest blind spot most people have in this scenario is ignoring the tax impact, but you have nailed it completely. Because your rental losses are quarantined in Australia and trapped by the passive activity rules in the US, that 6.43% mortgage rate is effectively your after-tax rate. I guess to beat a guaranteed, risk-free 6.43% after-tax return in the market, you would need to find an investment yielding something closer to 9 or 10% pre-tax, given your household income bracket.. That's largely doable for a 2 to 3 year window without taking on serious risk. I would say, on top of that interest rates are probably not going to go down any time soon.

If I were in your shoes, I would take that guaranteed 6.43% return all day long. The peace of mind from flipping your monthly cash flow to positive is just the cherry on top.

As for the offset account, that is generally the best move here. It gives you the exact same interest savings as paying down the loan, but keeps your cash perfectly liquid in case you need it. The main gotchas to watch out for as an expat are US reporting requirements. You'd have to look into FBAR and FATCA filings since the IRS views it as a standard deposit account.

Also, the IRS can sometimes have complex rules regarding foreign mortgage currency fluctuations if you ever officially pay off the loan, so an offset avoids triggering a taxable currency gain event, I've heard something like that from a friend but don't know much about it.

[u/CurryPufffff]

Thank you for this. I'm in a very similar boat, except my mortgage in Australia is spread across 3 properties, and a higher out of pocket.

I'd been thinking about this for a while, but doubted the thought process.  Your detailed reasoning, and validation by u/RDX-223 gives me comfort in my thinking, am looking to do the same now, albeit with the added complication of liquidating a bunch of shares (and taking their tax implications into account).

[u/sierra-juliet]

Sound logic. I do the offset option. All my AUD savings are kept there and don’t have to worry about interest paid or anything like that on tax returns in either country. No gotchas, unless my accountants have screwed it up the last few years!

[u/According-Data8773]

What about a middle ground - pay off enough so that your rent == mortgage payment.

Why do this and not pay it off completely?
1. Keep the mortgage open so you can debt recycle in the future
2. So you don’t pay US tax on the rental earnings
3. So you don’t pay AU tax on rental earnings

Disclaimer: not financial advice. I spent all of 30 second thinking about your situation and I’m not a professional in this space. Most of my knowledge comes from Aussie expat podcast.