A fair comparison: the same money, the same horizon
The question is simple: you have some extra cash each month. Should it go toward the mortgage or into investments? A fair answer has to spend exactly the same amount of money in both cases and look at both at the same date. This calculator gives both strategies the same monthly budget, your normal mortgage payment plus the extra amount, for the whole remaining term of the loan, and then compares what you own at the end.
- Prepay first, then invest. The whole budget goes to the mortgage until it is paid off. From then on the entire budget, including the payment you no longer owe, is invested every month.
- Keep the schedule, invest the extra. You pay the normal mortgage payment until the scheduled end and invest the extra amount every month from the start.
At the end of the term both mortgages are paid off and both strategies still own the same home, so the comparison comes down to the two investment portfolios. The difference shown is investing net value minus prepaying net value.
Why "interest saved" is not the answer
A common shortcut compares the interest you avoid by prepaying with the investment gains on the extra money. That ignores the most important effect of prepaying: once the loan is gone, the whole former mortgage payment is free to invest for the rest of the term. This calculator models that freed cash month by month. The interest avoided is shown as a supporting fact, but it is not added to the result again, because it is already inside the larger portfolio it makes possible.
The calculation
With a monthly mortgage rate i = annual rate ÷ 12 and n months left, the scheduled payment is M = B × i ÷ (1 − (1 + i)−n), or B ÷ n at a 0% rate. The common budget is C = M + extra. The investment return you enter is an effective annual rate, so the monthly growth factor is (1 + r)1/12. Each month the loan accrues interest and the portfolio grows; the prepay strategy pays as much of C as the loan needs, the scheduled strategy pays M, and whatever is left of C that month is invested. In the month the loan is cleared, the unused part of the payment is invested straight away.
Worked example
A small loan makes the mechanics easy to follow. Balance 1,200 at 0% with 12 months left: the scheduled payment is 100, and with an extra 100 the budget is 200 a month. Prepaying clears the loan in month 6 and then invests 200 a month for six months. The scheduled strategy invests 100 a month for all twelve months. At a 12% effective annual return the prepay portfolio ends at 1,228.83 and the investing portfolio at 1,264.65, a difference of +35.82 in favour of investing, because money invested earlier has longer to grow. At a 0% return both end at exactly 1,200.00.
The default inputs are a 300,000 balance at 6.5% with 300 months left and 500 extra a month. The scheduled payment is 2,025.62, so the budget is 2,525.62. Prepaying clears the loan in month 191 and avoids 125,588.47 of interest. With an 8% effective annual return the prepay route ends with 397,794.10 invested and the scheduled route with 454,495.48, so investing is ahead by 56,701.38. At a 6% return prepaying is ahead by 24,373.87 instead. Read the full guide for the method, the scenario table and what the model leaves out.
The break-even return
Prepaying earns exactly the mortgage rate. When the investment return equals the mortgage rate expressed as an effective annual rate, both strategies end level: for 6.5% compounded monthly that is about 6.6972% a year. Above it, investing comes out ahead in this model; below it, prepaying does. The sensitivity table shows how far the result moves for two percentage points either side of your assumption, and for no extra payment, your extra amount and twice your extra amount.
What the model leaves out
Taxes are excluded: mortgage interest deductions, tax-advantaged accounts and taxes on investment gains depend on where you live and can change the answer in either direction. Prepayment penalties, trading costs, variable mortgage rates and refinancing are not modelled; to test a new rate, use the refinance break-even with remaining debt. The return is a steady assumption, while real returns vary, sometimes sharply, from year to year. Keep a separate cash reserve before doing either; the emergency fund calculator helps size it. To see the effect of compounding on a monthly investment on its own, use the compound interest calculator, and for payment schedules on other loans the loan payment calculator.
FAQ
Why does the calculator use the same monthly budget for both options?
Because otherwise one strategy would simply be spending more money. Holding the monthly cash outlay equal for the full term means the only difference between the two results is where the money went, not how much of it there was.
What happens to the mortgage payment after the loan is paid off early?
It is invested, together with the extra amount, every month until the original end of the term. Leaving this step out makes prepaying look worse than it is.
Should I enter the investment return as a nominal or effective rate?
Effective annual: the growth you expect over a full year after fund fees, for example 8% meaning 100 becomes 108. The mortgage rate is entered as the usual nominal annual rate compounded monthly, which is how most lenders quote it.
Does the result include taxes or the mortgage interest deduction?
No. All figures are before tax. If your mortgage interest is deductible, the effective cost of the loan is lower, which favours investing; if your investments are taxed, their effective return is lower, which favours prepaying. Check your own situation with a tax adviser.
If investing comes out ahead, is it the better choice?
Not necessarily. The result assumes the return you entered is earned every year. A prepayment is a guaranteed return equal to your mortgage rate; investing carries the risk of a poor sequence of returns, and many people value being debt-free earlier. Use the result to see how much return you are relying on, not as a recommendation.
Educational model, not financial or tax advice.