Pay off your mortgage early or invest? The numbers, taxes included

You have a mortgage, you have €200 a month left over, and you are torn between sending it to the bank early or putting it into an index fund. It is one of the most common personal-finance questions, and it is usually answered in one line: "if the stock market returns more than your mortgage costs, invest". That is half true. Let's do the full sum.

What you are really comparing

• Overpaying gives you a guaranteed return equal to your mortgage rate. Every euro you pay early stops accruing interest at that rate, whatever the markets do.
• Investing gives you an expected return, never a guaranteed one. A global fund has historically returned well above today's mortgage rates, but with years of 30%+ drops along the way.

So the right question is not "which returns more?" but "how much more do I expect to earn by investing, and is it worth the risk of not earning it?".

The example: €150,000 over 20 years

Take a mortgage with €150,000 outstanding, 20 years to go and a 2.5% rate. The payment is €794.85 and, doing nothing extra, you would pay €40,765 in interest. You have an extra €200/month and two paths:

1. Overpay to shorten the term: the €200 goes into the mortgage every month. You finish 58 months early (almost 5 years) and save €10,526 in interest. For those last 58 months you invest the payment you no longer make plus the €200.
2. Invest from today: the mortgage runs its normal course and the €200 goes into an index fund returning 6% a year for 20 years.

Both paths end in the same month with the mortgage paid off, so final wealth is directly comparable:

Mortgage rate	Overpay	Invest	Invest advantage (gross)	After income tax
1.5%	€62,291	€92,870	€30,579	€22,985
2.5%	€67,081	€92,870	€25,789	€18,336
3.5%	€73,580	€92,870	€19,290	€12,063
4.5%	€80,565	€92,870	€12,305	€5,324

The last column is the one almost nobody works out. If you sell at the end, the investment gain is taxed as savings income (19%–23% at these amounts), while the interest you save by overpaying is not taxed at all. With a 2.5% mortgage, the tax office takes about €7,500 of the investing advantage: investing still wins, but by quite a bit less than it seems.

The assumption that decides everything: the 6%

The whole table depends on the fund returning 6% a year for 20 years. With the same 2.5% mortgage but a 4% investment return, the net advantage of investing drops to €5,742. And if the market does worse over your particular 20 years — it has happened — overpaying wins.

That is why the practical rule has more nuance than "invest if stocks return more":

• Mortgage below 2%: investing usually has a wide expected edge. Almost any long horizon justifies it.
• Between 2% and 4%: grey zone. The expected gap exists but is moderate once you account for tax and risk. Many people split.
• Above 4%–5%: overpaying is a guaranteed return that is hard to beat by a margin large enough to justify the risk.

Three costs that change the result

1. The early-repayment fee. Since Spain's Ley 5/2019, variable-rate mortgages can charge at most 0.25% during the first 3 years or 0.15% during the first 5 (depending on the contract), and nothing after that. Fixed-rate ones can charge up to 2% in the first 10 years and 1.5% afterwards. Check your deed: on a fixed mortgage it can eat much of the saving.
2. The main-residence tax credit. If you bought before 2013 and are still under the transitional regime, you deduct 15% of up to €9,040 paid per year. Overpaying below that figure makes you lose credit; above it, it does not.
3. The fund's cost. A 0.2% TER barely moves the sum; a 1.5% one eats most of the investing advantage. If you invest instead of overpaying, do it with cheap funds.

Shorten the term or lower the payment?

If you do overpay, shortening the term saves more interest: the balance falls the same, but you stop paying interest for the years you remove. Lowering the payment saves less, although it frees up money every month. It makes sense if your budget is tight or you want to invest the difference — in which case you are gradually doing both at once.

What no table shows

• Liquidity. Invested money can be sold within days; overpaid money never comes back. Before prepaying a single euro, have your emergency fund in place.
• Peace of mind. Being mortgage-free at 55 instead of 60 has a value that does not appear in euros, and it is perfectly legitimate to pay for it.
• Your behaviour. Investing only wins if you stay invested through the drops. If you know you would panic-sell, the guaranteed return of overpaying is worth more than the table says.

In short

• Overpaying returns exactly your interest rate, risk-free and tax-free; investing returns more in expectation, but neither guaranteed nor tax-free.
• With €150,000 at 2.5% and €200/month extra, investing at 6% leaves about €18,000 more after tax. At a 4.5% mortgage the edge shrinks to about €5,300.
• Check the early-repayment fee and the main-residence credit before deciding.
• Splitting between both options is a reasonable answer, not indecision.

Educational content, not financial advice. Past returns do not guarantee future ones, and the figures assume a constant return that does not exist in reality.