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.
Updated · Figures calculated with the mortgage vs invest calculator
The short answer
Paying extra off your mortgage earns exactly its interest rate, with no risk and usually no tax. Investing the money only comes out ahead if it earns more than that, after tax. On a 6% mortgage the bar is 6.17% a year before tax, and higher if investment returns are taxed.
If you are confident of beating that over the long run, and can live with the years when you do not, investing usually wins by a margin that grows with time. If not, overpaying is the certain return.
Why the mortgage rate is the bar
Every dollar paid off the loan stops interest being charged on it for the rest of the term. That saving is the return on the dollar, and it equals the mortgage rate. The mortgage vs invest calculator follows two households with the same budget, one overpaying and one investing, and finds they finish level when investments earn the mortgage's true yearly cost. That holds whatever the amount, the balance or the term.
On the calculator's starting scenario, a $400,000 mortgage at 6% with 25 years left and $500 a month spare, overpaying clears the loan 7 years 5 months early and saves $125,547 of interest. Investing the same money at 7% a year leaves you $34,075 better off after 25 years.
The return you need after tax
Interest saved on your own home loan is usually not taxed; investment returns usually are. So the return your investments need before tax is higher than the mortgage rate. Each figure below is the pre-tax return that matches overpaying, at a given rate of tax on returns:
| Mortgage rate | 0% tax | 15% tax | 30% tax | 45% tax |
|---|---|---|---|---|
| 4% | 4.07% | 4.79% | 5.82% | 7.41% |
| 5% | 5.12% | 6.02% | 7.31% | 9.30% |
| 6% | 6.17% | 7.26% | 8.81% | 11.21% |
| 7% | 7.23% | 8.50% | 10.33% | 13.14% |
| 8% | 8.30% | 9.76% | 11.86% | 15.09% |
This is a simplification: real tax depends on the kind of return, how long it is held and the account it sits in. Tax-advantaged retirement or pension accounts can lower the bar a long way, and where mortgage interest is deductible, overpaying is worth less than its headline rate.
What is at stake either way
On the same scenario, two points of return make a large difference over 25 years. At 9% a year investing finishes $143,596 ahead; at 5% it finishes $38,851 behind. The interest saved by overpaying, $125,547, does not depend on markets at all.
The horizon matters too. Judged after 10 years instead of 25, investing at 7% is $3,586 ahead. The longer the money is invested, the more compounding works for it, and the more chance a poor stretch of returns has to recover.
When overpaying makes more sense
- Your mortgage rate is high compared with what you could reliably earn after tax.
- You would sleep better owning your home outright, or plan to retire soon.
- You have an offset or redraw facility, so overpayments stay available. Money in an offset account earns the mortgage rate without being locked away.
When investing makes more sense
- Your mortgage rate is low, especially a long fixed rate below what markets have returned.
- You can invest in a tax-advantaged account, such as a retirement fund.
- You have decades ahead and can ride out bad years without selling.
Before either
- Clear any dearer debt, such as credit cards or personal loans.
- Keep an emergency fund you can reach without borrowing.
- Check your loan allows extra repayments without fees, especially on a fixed rate.
- Put your own figures into the calculator and compare the break-even with the return you could realistically keep after tax.
More guides
- 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.