Should I pay extra off my mortgage or invest it?
Mortgage vs invest calculator
Paying extra off the mortgage saves interest for certain. Investing it might earn more. Here is what each leaves you with, and the return investing has to beat.
Figures and method reviewed · How we calculate
Investing only beats overpaying if your investments earn more than
6.17% a year
At 7% a year, investing comes out $34,075 ahead after 25 years. That is the mortgage's own cost, 6.17% a year: every extra dollar paid off earns exactly that, with certainty.
- Interest saved by overpaying
- $125,547
- Mortgage cleared
- 7 years 5 months early
- Better off after 25 years
- Investing, $34,075
Your numbers
Your net worth, year by year
Investments less what is still owed on the mortgage. Both start at minus the balance and spend exactly the same each month. Higher is better.
Where each choice ends up
| Investments at the end | $357,446 |
|---|---|
| Mortgage still owed | $0 |
| Interest paid on the mortgage | $247,614 |
| Mortgage cleared | After 17 years 7 months |
| Net worth | $357,446 |
| Investments at the end | $391,521 |
|---|---|
| Mortgage still owed | $0 |
| Interest paid on the mortgage | $373,162 |
| Mortgage cleared | After 25 years |
| Net worth | $391,521 |
Overpaying clears the mortgage 7 years 5 months early. Once the overpayer is debt-free, the whole repayment and the extra are invested, so both households put the same into their homes and investments each month. Tax, fees and offset accounts are not included.
How to read the result
The big number is the break-even investment return: what your investments would need to earn each year for investing the spare cash to leave you exactly as well off as paying it off the mortgage. Above it, investing wins. Below it, overpaying does.
It is the mortgage's true yearly cost. Each extra dollar you pay off stops interest being charged on it, so it earns the mortgage rate, guaranteed. That is why the amount, the term and the period do not move the break-even: the comparison is always certain mortgage interest against uncertain investment returns.
A worked example
The calculator starts with a $400,000 mortgage at 6% with 25 years left, and $500 a month of spare cash. Investments are assumed to return 7% a year.
- Overpaying takes the repayment from $2,577 to $3,077 a month. The mortgage is cleared 7 years 5 months early, saving $125,547 of interest. From then on the whole $3,077 a month is invested, which grows to $357,446 by the end of 25 years.
- Investing keeps the scheduled repayment and invests $500 a month from the start. After 25 years the investments are worth $391,521.
At 7%, investing comes out $34,075 ahead, because 7% beats the mortgage's 6.17%. But the gap depends entirely on the return being achieved, and the interest saved by overpaying does not.
The same mortgage at different returns
| Investments earn | Result after 25 years |
|---|---|
| 3% a year | Overpaying ahead by $86,173 |
| 5% a year | Overpaying ahead by $38,851 |
| 6% a year | Overpaying ahead by $6,188 |
| 7% a year | Investing ahead by $34,075 |
| 9% a year | Investing ahead by $143,596 |
How much overpaying saves
| Extra each month | Interest saved | Mortgage cleared |
|---|---|---|
| $200 | $64,041 | 3 years 8 months early |
| $500 | $125,547 | 7 years 5 months early |
| $1,000 | $185,803 | 11 years 3 months early |
| $2,000 | $246,033 | 15 years 4 months early |
The mortgage rate sets the bar
| Mortgage rate | Break-even return | At 7% return |
|---|---|---|
| 4% | 4.07% | Investing ahead by $106,390 |
| 5% | 5.12% | Investing ahead by $72,691 |
| 6% | 6.17% | Investing ahead by $34,075 |
| 7% | 7.23% | Overpaying ahead by $9,946 |
| 8% | 8.30% | Overpaying ahead by $59,852 |
Tax usually favours overpaying
In many countries investment returns are taxed, while the interest saved on your own home loan is not. Here is the default scenario with 7% returns taxed at a range of rates:
| Tax on returns | Return after tax | Result |
|---|---|---|
| 0% | 7% | Investing ahead by $34,075 |
| 20% | 5.6% | Overpaying ahead by $20,090 |
| 30% | 4.9% | Overpaying ahead by $41,750 |
Tax-advantaged accounts, such as retirement or pension schemes, change this again, as does mortgage interest that is tax-deductible. The rule is the same: compare the return you keep after tax with the break-even.
Other things to weigh
- Access to the money. An overpayment on a standard loan is locked in the house. An offset or redraw facility, or an emergency fund kept aside, keeps it available.
- Risk. The interest saved is certain; investment returns are not, and a bad decade can leave investing behind even when the long-run average looks good.
- Dearer debt first. Credit cards and personal loans almost always cost more than a mortgage. Clear those before either.
How it is calculated
- Repayments use standard amortisation at a fixed rate over the years left, paid monthly.
- Overpaying adds the extra to each repayment. Once the mortgage is cleared, the full repayment and the extra are invested every month.
- Investing makes the scheduled repayment and invests the extra every month.
- Investments grow monthly at the rate that compounds to the stated yearly return. Net worth is investments less any balance still owed.
- The break-even is the return at which both finish level, found by search.
Questions about this calculator
How does the mortgage vs invest calculator work?
It follows two households with the same mortgage and the same spare cash each month. One adds the spare cash to its mortgage repayments; the other makes only the scheduled repayment and invests the spare cash. Once the first has cleared its mortgage, it invests everything the mortgage used to take.
Both pay out exactly the same each month, so their net worth at the end, investments less anything still owed, compares the two uses of the money and nothing else.
Why is the break-even return the same as my mortgage rate?
Every extra dollar paid off the mortgage stops interest being charged on it, so it earns the mortgage rate, exactly and with no risk. Investing only does better if it earns more than that. The figure shown is the true yearly cost of the mortgage, a little above its quoted rate because interest is charged monthly.
Does it account for tax?
No. Investment returns are usually taxed, while the interest saved by overpaying a home loan usually is not, so the after-tax return on investments has to be higher than the break-even for investing to win. Where mortgage interest is tax-deductible, the opposite applies. Compare your after-tax return with the break-even.
What about an offset or redraw account?
Money in an offset account reduces the interest charged just as an overpayment does, so it earns the same rate while staying available to you. The calculator treats overpayments as locked away, which is how a standard loan without redraw works.
Are the figures adjusted for inflation or rate changes?
No. The mortgage rate and the investment return stay fixed for the whole period, and all amounts are nominal. Try a few rates either side of today’s to see how sensitive the answer is.
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Guides
- Should you pay off your mortgage early or invest? Overpaying earns your mortgage rate for certain; investing has to beat it after tax and risk. Here is where the line falls, and what moves it.
- How much does a house need to appreciate to beat renting? Less than most people assume when rents are high, and far more when they are not. Here is the break-even growth across a range of rents and mortgage rates, and how to work out your own.
- Is it better to pay cash for a car or finance it? It comes down to one comparison: what your cash would earn against what the loan really costs. Here is how to make it properly, and the two offers that can flip it.
- Does a rental property beat a savings account? Only if it grows fast enough to cover the gap between its rent and its interest. Here is how fast that is, across yields and loan rates, before tax.