You have 500 a month spare. Should it go towards your mortgage or into investments? Both are sensible, and people argue about it endlessly. The truth is that the answer depends on one comparison: the guaranteed return you get by paying down the loan against the uncertain return you might get from investing.

The Setup

You owe 250,000 on a 25-year mortgage at 5.5%. The monthly payment is about 1,535.22, and over 25 years you would pay about 210,566 in interest. You have 500 extra each month.

Option A: Extra Payments

Adding 500 to each payment clears the loan in about 182 months, which is 15.2 years instead of 25, and saves roughly 92,100 in interest. After the loan is gone, you could invest the full freed-up amount, which is the old payment plus the extra 500.

Option B: Invest the 500

You keep paying the normal mortgage and invest 500 a month. After 25 years, the result depends on the return:

  • At 7% a year, the investments grow to about 405,000.
  • At 4% a year, they grow to about 257,000.

Comparing Final Wealth

To compare fairly, assume in Option A that you invest 2,035 a month (the old payment plus 500) in the 118 months after the loan is repaid, up to month 300.

  • At 7%, Option A ends with about 344,000 and Option B with about 405,000. Investing wins by roughly 61,000.
  • At 4%, Option A ends with about 294,000 and Option B with about 257,000. Paying off the mortgage wins by roughly 37,000.

The mortgage rate is 5.5%, so you can see where the line falls: if your investments earn more than about 5.5% after tax and fees, investing tends to come out ahead, and if they earn less, prepaying wins.

What the Simple Comparison Leaves Out

  • Risk. Paying down a loan is a certain return equal to your mortgage rate. Investment returns are not guaranteed, and a poor decade can leave you behind.
  • Taxes. In some countries, mortgage interest is tax deductible, which lowers the real cost of the loan. Investment gains and pension contributions may also have tax benefits.
  • Liquidity. Money in a mortgage is hard to get back, while investments can usually be sold. If you lose your job, a lower mortgage balance does not help you pay the bills.
  • Prepayment rules. Some lenders limit extra payments or charge penalties.
  • Behaviour. Many people find the guaranteed return of becoming debt-free very motivating, and others are happy to invest through market falls.

A Sensible Order of Priorities

  • Keep an emergency fund. Our guide on how much you need covers it.
  • Take any employer pension match, because it is an instant return.
  • Pay off high-interest debt such as cards first.
  • Then compare your mortgage rate with a realistic after-tax return for your investments. Use a conservative return, not the best year you can remember.
  • Consider a mix: split the spare money between extra payments and investing.

A Note on Interest-Free Finance

If your home financing is structured as Murabaha or a diminishing partnership, prepayment rules differ and early settlement may earn a rebate, but it is often discretionary. Check your contract. The comparison with investing still applies, though the figures will differ.

Our mortgage payment guide explains the formula behind the figures above, and the guide to dollar-cost averaging versus lump sum covers the investing side.

A Practical Next Move

Find your mortgage rate, estimate a cautious after-tax return on investments, and compare them. If the numbers are close, the decision is about risk and peace of mind, so choose the one you can stick with.