Invest or repay the mortgage
You have spare money and a mortgage. Compare how an overpayment and investing would each turn out, on your own figures.
Why compare these two options?
You have money spare and a mortgage. There are two things to do with it, and both can move you forward, just in different ways.
Repaying the mortgage saves you future interest. Send the bank €20,000 and you will never pay interest on that amount again. It is a saving that happens with complete certainty: it does not depend on the market, on sentiment, or on what next year brings.
Investing gives you a possible return. The same money may earn more in the market than it would have saved in interest. Or it may not. It can also fall.
Repaying a mortgage is investing too
This is the idea the whole comparison rests on. If your mortgage is at 4% and you repay part of the principal, the interest you save is exactly what an investment returning 4% would have earned you.
So repaying a mortgage is not “doing nothing”. It is an investment returning your mortgage rate, with a certainty no fund will give you.
That is exactly why there is a break-even point. An investment has to earn at least what the mortgage costs you, or it is not worth it.
What moves the result
- Time
- The longer the horizon, the more room compounding has, and the larger the gap in either direction. A short horizon squeezes the differences flat.
- Fees
- A fund's fee is charged every year on the whole of the assets. Half a percent a year sounds small, but it pushes the break-even up: the investment has to earn more just to draw level with repaying.
- Tax
- This is the asymmetry most often overlooked. Investment gains are taxed. Interest you do not pay on a mortgage is not, because it is not income. Tax therefore always favours repaying.
- Inflation
- It cuts the real value of both results equally, so it does not change which one wins. It does change what the final sum actually buys.
- Certainty
- It fits into no number at all. The interest saved is certain, the investment return is an estimate, and that is why the two figures cannot be compared on quite the same footing.
What the model does not answer
It takes no account of whether you have an emergency fund. Sending your last cash to the bank and leaving yourself no cushion is usually a worse decision than either scenario in the table.
It does not allow for the bank charging a fee for an overpayment, or for any tax relief on the mortgage.
And it does not know you. For some people the debt weighs enough that sleeping easier is worth a few thousand euro. That is a legitimate reason; it just cannot be added up.
This tool does not give financial advice. It shows how your own assumptions would play out, not what you should do.
Related terms and tools
The foundations are principal, amortisation and compound interest. On the investing side it is worth knowing return, risk and inflation.
The mortgage itself is taken apart in the mortgage calculator, the effect of a single overpayment in the early repayment calculator and the growth of an investment in the compound interest calculator.
Related topics
Terms that come up in this calculation
- PrincipalThe amount you actually borrowed and have to return. Interest is the price of borrowing it, and it is always calculated on whatever of the principal is still outstanding.
- AmortisationPaying off a debt gradually through regular instalments. Each instalment covers the interest first and reduces the principal with what is left, and the balance between the two shifts over time.
- Compound interestA way of charging interest in which the interest credited is added to the principal and earns alongside it in the next period, so you earn on interest earned earlier too.
- ReturnThe amount or the percentage by which an investment has earned. It can be expressed in euro or in percent and only after deducting inflation does it tell you how much more you can buy.
- RiskThe degree of uncertainty about how an investment will turn out. A higher possible return usually comes with higher risk, but that is a possibility, not a promise.
Calculators that follow on from this one
- MortgageWork out your monthly mortgage payment, the total interest and the LTV, with a full amortisation schedule, overpayments and side-by-side scenarios.
- Early repaymentFind out how much an overpayment on your mortgage could save, and whether shortening the term or lowering the payment serves you better.
- Compound interestWork out how an investment grows under compound interest, including regular contributions, the effect of inflation, and a year-by-year breakdown.