The comparison, stated properly#
An extra pound toward the mortgage earns you a guaranteed, risk-free, tax-free return equal to your rate. That framing matters. A 6% mortgage paid down is a 6% return with no volatility and no tax drag, which is a genuinely excellent risk-adjusted number.
Investing has returned more — the S&P 500 has averaged around 10.26% annualised since 1957, call it 7–8% after tax — but with real variance. There are losing years, and there are losing decades.
So the bands:
- At 5% or below, invest. Paying down a 3% loan to avoid 3% interest while forgoing 7–8% after tax is a straightforward loss.
- At 6–7%, it’s close, and “close” means the non-financial considerations legitimately decide it.
- Above that, paying down starts to look strong on the maths alone.
Which is why this question feels different than it did a few years ago. A 30-year fixed currently sits near 6.78%. Anyone who borrowed at 2.9% in 2021 has an easy answer; anyone borrowing now is squarely in the band where it’s genuinely arguable.
Why identical numbers don’t produce identical outcomes#
Here’s the part that trips people up. Even with an 8% mortgage rate and an 8% investment return, the two paths diverge — because you’re comparing two different mathematical processes.
Extra mortgage payments work through amortisation: they cut principal, which removes future interest. Invested money works through compounding: it grows on itself from day one.
The worked comparison: $500 a month for 25 years invested at 8% grows to over $473,000. The same $500 a month against the mortgage saves about $188,000 in interest. Same money, same rate, wildly different results, because avoiding a cost is not the same operation as compounding a return.
This asymmetry gets wider the longer the horizon, which is the second rule restated: time favours the compounding side.
The front-loading nobody warns you about#
Worth understanding even if you decide to invest.
On a $400,000, 30-year loan at 7%, the payment is about $2,660 a month. In month one, roughly $2,333 of that is interest and only about $327 touches the principal.
It stays lopsided far longer than intuition suggests. For the first 20 years of a 30-year term, interest exceeds principal every single month. Twenty years in — two-thirds of the way through — you’ve repaid only about 42.75% of what you borrowed, still owing around $229,200.
Total interest on that loan: $558,035, against $400,000 borrowed. At 5% it’s about $373,000. At 3%, $207,109.
The practical consequence is that early extra payments are worth vastly more than late ones, because every pound of principal removed in year two cancels 28 years of interest on that pound.
Three ways to do it, if you decide to#
All three are the same thing — more money against principal, earlier.
Bi-weekly payments. Pay half the monthly amount every two weeks. Twenty-six half-payments is thirteen monthly payments a year rather than twelve. On that $400k loan at 7%, it clears in 23 years 11 months, saving six years and over $134,000.
A fixed extra amount. An extra $200 a month saves roughly six years and $126,000 in interest.
Lump sums. A one-off $12,500 from a bonus or refund pays the loan off 2 years 10 months early and saves $78,892.
One critical operational note: tell your lender to apply extra payments to principal. Left unspecified, many will apply it to the next scheduled payment instead, which does almost nothing. Check the statement after the first one.
Where the maths stops being the point#
The spreadsheet answer is usually “invest,” and plenty of people should still pay the house off.
No mortgage payment means your required monthly income drops permanently, which changes what you can survive — a redundancy, a career change, a business you’d otherwise never risk starting. It lowers your debt-to-income ratio. It leaves an asset that’s genuinely yours.
None of that shows up in a compounding calculation, and it’s real. If the choice is close — and at today’s rates it is — buying certainty with a few percentage points of expected return is a defensible purchase, not a failure of nerve. Just make it knowingly, with the number in front of you, rather than because debt feels bad.
The one combination that doesn’t work is paying the mortgage down aggressively while carrying credit card debt at 20%. Clear that first, always.
So what to actually do#
- Find your exact rate. That single number resolves most of this.
- Below 5%: invest. Above 7%: pay down. In between, decide on how much you value certainty.
- Whatever you choose, clear anything above 10% first.
- If paying down, instruct the lender to apply extra to principal and verify on the next statement.
- Front-load it. Extra payments in year three are worth several times the same money in year twenty.
- Write down why you chose. In the close band both answers are right, and the failure mode is switching every time the market moves.
Sources & further reading#
- Compare today’s 30-year mortgage rates — Bankrate — current rates near 6.78%, placing most new borrowers in the contested band.
- Mortgage Rates (PMMS) — Freddie Mac — the weekly primary mortgage market survey, the standard reference series.
- Does Market Timing Work? — Charles Schwab — supporting evidence on long-run equity returns versus holding cash.
