Pay Off Mortgage or Invest? The 2025 Math Guide

You have some extra savings. Maybe €10,000, or €500 extra each month. And you face the great financial dilemma: Should I use this money to reduce my mortgage or should I invest it in the stock market?

It is a question that generates heated debates. Some prioritize the "peace of mind" of having no debt (amortize). Others prioritize "mathematical profitability" (invest).

In 2025, with interest rates stabilizing after previous hikes, the answer depends purely on math... and your risk tolerance. Let's analyze it.

The Basic Equation

The decision comes down to comparing two rates:

1. The Cost of your Debt: Your mortgage interest rate.
2. The Return on your Investment: What you expect to earn in the market (net of taxes).

Scenario A: "Cheap" Mortgage (Rates < 3%)

If you signed your mortgage before 2022, you likely have a fixed rate at 1%, 1.5%, or 2%.

• Cost of amortizing: You "save" 1.5% interest. That is your guaranteed return.
• Benefit of investing: Historically, the S&P 500 or a global fund returns 7-8% annually long-term.
• Decision: INVEST.
  • Mathematically, earning 7% is much better than saving 1.5%.
  • By amortizing a cheap mortgage, you are "killing" cheap money. Inflation (even at 2-3%) is "paying" part of your debt for you.

Scenario B: "Expensive" Mortgage (Rates > 4-5%)

If you signed recently or have a variable mortgage that has skyrocketed.

• Cost of amortizing: You save 4.5% or 5% interest. This is a guaranteed, risk-free return.
• Benefit of investing: You expect 7-8%, but it is not guaranteed. In a bad year, the market can drop 20%.
• Decision: AMORTIZE (or Mix).
  • Earning a guaranteed 5% net (by amortizing) is a spectacular return. Few investments offer 5% risk-free.
  • Here, amortizing is financially very sensible.

The Psychological Factor and Risk

Math says one thing, but life says another.

The risk of investing: If you decide to invest instead of amortize, you must be prepared for volatility. If the market drops 30% tomorrow, will you panic sell? If the answer is yes, better to amortize. The investing strategy only works long-term (10+ years).

The peace of mind of amortizing: Having no debt reduces stress. If you lose your job, having the house paid off drastically reduces your fixed expenses. For many people, sleeping soundly is worth more than an extra 2% return.

The Power of Compound Interest vs Amortization

Let's look at a numerical example over 20 years. You have €20,000 extra.

• Mortgage at 3%.
• Investment at 7% (after estimated taxes).

Option 1: Amortize €20,000 You save 3% interest on those 20k for 20 years. Total approximate savings in interest: ~€16,000. Total benefit: 20,000 (principal) + 16,000 (unpaid interest) = €36,000 of value.

Option 2: Invest €20,000 You invest at 7% compound interest for 20 years. Formula: $20,000 * (1.07)^{20}$ Final value: ~€77,393.

Difference: Investing generates €41,000 MORE than amortizing in this period. Even paying taxes on gains (say 20%), you still win much more.

Hybrid Strategy: The Balanced Solution

If you can't decide, do both. Use a ratio. For example:

• If your mortgage is at 2%: Invest 100%.
• If your mortgage is at 3-4%: Invest 50%, Amortize 50%.
• If your mortgage is at 5%+: Amortize 100%.

Conclusion

1. Check your mortgage interest rate.
2. Is your rate low (<3%)? Invest. Do not rush to pay off cheap debt.
3. Is your rate high (>4%)? Amortize. It is an excellent guaranteed return.
4. Use our Smart Scenarios calculator to see exactly how much time and interest you save by amortizing today.

Calculate Savings Now