Should You Repay Your Mortgage Early or Invest Instead?

Result

Adding such extra payment saves you 30.399 € and means that you are done with your loan quicker. We assume here that your monthly repayment remains the same at the end of the fixed interest rate.

By making these extra payments, you are effectively earning a return equal to your mortgage interest rate 3,19 % on that money.

What if you Invest Instead?

If you would instead invest in a good, widespread ETF portfolio, you would earn an additional 235.719 € by the time your mortgage payments are done. You could repay your loan even earlier:

Life Time Impact and Risk

What about the long-term impact: how does repaying your loan by more or investing in ETFs change your net wealth at age 60? Looking at a long horizon is important because the longer you invest in ETFs the safer they are. And the earlier you invest, the bigger the impact is.

Keep in mind:

• Companies are an essential part of the economy. In the long-run ETFs that represent a wide part of the economy follow a much more stable path.

• Taking investment risk creates a financial buffer that, over time, makes you financially a lot safer.. Being financially safe is especially important when you are older, as you may then have less appetite or capacity to work!

The key inputs underlying this outlook are:

• Worst-case return for a portfolio held over 15 years is 5%.

• The average expected return of an excellent portfolio--Pensionfriend’s--is 7,2%.

Both these return numbers are after tax and cost.

It does require choosing a good portfolio. Many portfolios yield worse returns; for example, the average emerging market ETF is much worse, and people don't realize that. Indeed, most individuals perform far worse as they tend to move in and out of the market at the wrong time.

Do consult our professionals. They know both mortgages and investments.

Understanding the Opportunity Cost: Repayment vs. Investment

Most traditional bank advisors just advise repayment or perhaps ETFs, but we dig deeper.

As your interest rate is relatively high, the gain from investing in stock ETFs is smaller, but would still add up over time.

Fundamentally, investing in ETFs is attractive. Investing in a diversified global portfolio (ETFs) historically yields over 8% in the long term, but in our more conservative outlook, we assume 7,2%

If you put that money into your house, it’s gone. It’s illiquid equity. If you invest it, it grows. The rule of 72 tells you that with a 7,2% return, your money doubles every 10 years. So in 20 years your money grows fourfold, and in 30 years it is 8 times as much. In other words, in 30 years, you have a 700% return. That the difference is so big due to compounding. 

The Comparison: Here we compare the interest saved by prepaying versus the potential gains if you invested that same capital instead. As you can see, the gap between the investment return and the saved interest often widens significantly over time. Unless interest rates are sky-high (well above 5-6%), investing will outperform repaying the mortgage.

The Long-Term Growth Advantage: Interest Saved vs Investment Returns

The S&P 500 Reality Check: Stop Losing the Spread

In Germany, we are conditioned to fear debt, but mathematically, a low-interest mortgage isn't a burden—it's an asset. If you aggressively pay it off, you are effectively burning capital that could be working much harder for you.

The "Spread" is Your Profit

This isn't about speculation; it is about arbitrage, which simply compares the cost of debt against the return on capital. Your mortgage likely costs you around 3.5%, meaning every Euro you repay saves you exactly that amount and creates a hard ceiling on your return. In contrast, the historical average return of the S&P 500 has been roughly 10% annually over the last century, while a broader global index like the MSCI World historically trends slightly lower. If you use your cash to pay off a 3.5% debt, you are turning down a potential 7-10% return. You might feel like you are saving 3.5%, but you are actually losing the difference between that and the market return every single year. Over 15 years, that difference doesn't just add up linearly; it compounds into a massive wealth gap.

Key Takeaways

• Don't automate it: Just because you can get a Sondertilgung doesn't mean you should. Compare your mortgage rate against probable market returns.

• Liquidity is king: Money in the walls of your house is hard to access. Money in an ETF or PPP is liquid or flexible.

Time is your friend. Compounding makes a huge difference over time, both in terms of expected return and in terms of the minimum return you can expect. Therefore, the sooner you start investing well, the better off you are in the end. 

Repaying debt may feel safe, but investing is, in most cases, by far the safer option in the long-term. Recommended Reading: Sondertilgung: A popular but overrated option