Should I overpay my mortgage or invest?

Should I overpay my mortgage or invest? This page will not answer that for you, because the honest answer depends on how much risk you are willing to carry, and that is not a sum. What it can do is show you the arithmetic properly, because the usual comparison is lopsided. There is exactly one return at which the two choices come out the same, and it is your mortgage's own interest rate. Try your numbers in the mortgage overpayment calculator as you read.

One side is guaranteed, the other is assumed

Every dollar or pound you pay off the mortgage early stops being charged interest for the rest of the loan. That is a return. It is paid at the mortgage's rate, and it is certain: you were going to be charged that interest, and now you will not be.

Investing the same money earns whatever the investments earn. Nobody knows that number in advance. It might be higher than the mortgage rate, it might be lower, and it will not arrive in a straight line. Why that matters is its own page.

So the question is not “which is bigger”. It is “a known rate, or an unknown one that might beat it”.

The comparison most people run is not like-for-like

Take a $250,000 mortgage at 6% with 25 years left. The required payment is $1,610.75 a month. Now add $200 a month on top.

• The mortgage clears in month 236 instead of month 300 — 64 months early.
• Total interest falls from $233,226 to $175,580, so $57,646 of interest is never charged.
• The same $200 a month invested for 25 years instead grows to $156,608, if returns average 7% a year.

Put side by side, $57,646 against $156,608 looks like no contest. But the two numbers measure different things. The first is interest avoided. The second is a whole pot, including the $60,000 you paid into it. And the first route has a second act that the comparison leaves out: once the mortgage is gone, the full $1,810.75 a month you were paying is free for the 64 months that remain.

Should I overpay my mortgage or invest? The fair version

To compare like with like, give both routes the same money for the same 25 years and see what each has at the end. Both finish with the mortgage cleared, so the only difference is the size of the investment pot.

• Overpay, then invest: pay the extra $200 a month until the mortgage clears in month 236, then invest the whole $1,810.75 a month for the last 64 months.
• Invest from the start: pay the mortgage as scheduled and invest $200 a month for all 300 months.

What each route has after 25 years, if investments return:

• 4% a year: overpay-then-invest ends with $130,857; investing from the start ends with $101,770. Overpaying is $29,087 ahead.
• 7% a year: $141,685 against $156,608. Investing is $14,923 ahead.
• 10% a year: $153,362 against $246,665. Investing is $93,303 ahead.

At 7%, the fair gap is about $15,000 — not the $99,000 the side-by-side version implies. Which way it goes depends entirely on a return nobody can promise.

The break-even return is your mortgage rate

There is one return at which the two routes finish level to the cent, and it is the mortgage's effective rate. A lender quoting 6% charges 0.5% a month, which compounds to 6.17% over a year. Run the investments at exactly 6.17% and both routes end with $138,598.79.

That is not a coincidence of these numbers. Paying down a debt that charges 0.5% a month and holding an investment that earns 0.5% a month are the same transaction seen from opposite sides, so they have to come out equal. It gives you the cleanest way to frame the question:

• If investments beat the mortgage's effective rate over the period, investing ends ahead.
• If they fall short of it, overpaying ends ahead.
• You will not know which until afterwards.

The rate matters more than anything else. Run the same loan at 3% and the break-even return drops to 3.04%. At 4% a year, investing from the start would then end $10,462 ahead instead of $29,087 behind. The lower the mortgage rate, the lower the bar the investments have to clear.

Pay off the mortgage early or invest: what the sum leaves out

The US phrasing of the question is the same arithmetic. The things the arithmetic cannot see are the same too, and they can outweigh it.

• Tax. Investment accounts can be taxed or sheltered, and mortgage interest is treated differently from country to country. A pension or retirement account that adds tax relief changes the investing side a lot. None of it is modelled here, because a wrong tax assumption is worse than none.
• Access to the money. Money paid into a mortgage is hard to get back out without borrowing again. Money in an investment account can be sold, though maybe at a bad moment.
• The path. The figures above assume a steady return every year. Real returns arrive in lumps, and a fall just before you need the money counts for more than the average suggests.
• Your mortgage terms. Many lenders limit how much you can overpay without a fee, and a variable or expiring fixed rate means the break-even moves. Check your own terms.
• Other debts. The same logic applies to any debt: paying it off returns its rate. A higher-rate debt sets a higher bar, which is why the debt payoff calculator is a useful check before this one.

Not financial advice. Worked examples assume a fixed mortgage rate, a quoted annual rate divided by twelve, no overpayment fees, no tax and a steady investment return. The loan and the return scenarios are illustrations, not quotes or forecasts.