Comparison: Mortgage vs. Investment

The decision hinges on a single threshold: the real cost of your mortgage versus your expected investment return. If your mortgage rate is 3 % and you expect 7 % annually from a stock index, the maths favour investing. If your mortgage rate exceeds your expected return, overpaying is a guaranteed saving.

However, the mortgage rate is a fixed, known cost; investment returns are uncertain. A bad market year can temporarily flip the comparison. This is why overpaying carries a security value the numbers do not always capture: certainty.

A balanced approach: maintain an emergency fund of 3-6 months of expenses, pay off expensive debts first (credit cards, personal loans), then decide between overpaying your mortgage or investing the surplus. Both strategies can be combined.

The break-even point where investing and overpaying are equal is roughly your mortgage interest rate. Historically, the S&P 500 has returned around 10 % per year (gross, in USD); the MSCI World, around 8 % per year; Spanish 10-year government bonds, between 3 % and 4 %.

With variable-rate mortgages tied to Euribor, rates rise and fall. In 2022-2024 the 12-month Euribor moved from negative to 4 %, dramatically shifting the analysis for many Spanish homeowners. At a 4 % mortgage rate, investing in equities is still reasonable over the long term (10+ years), but the mathematical edge shrinks and risk weighs more heavily.

With fixed-rate mortgages between 2 % and 3 %, diversified long-term investing has historically been the mathematically superior choice. Above 5 %, overpaying and equities are roughly equivalent on a risk-adjusted basis.

In the short term (under 3 years), equities are unpredictable — they can fall 30-40 % without recovering within that window. Mortgage overpayments always produce a guaranteed interest saving.

In the medium term (3-10 years), equities begin to show their historically positive risk premium, but market cycles mean results can vary enormously depending on entry and exit timing.

Over the long term (10+ years), historical evidence strongly favours diversified investing over early mortgage repayments on loans with moderate rates (below 4-5 %). Compound interest has time to work and volatility smooths out.

The maths is only part of the equation. Your income stability, psychological risk tolerance, and mortgage type (variable vs. fixed) determine which strategy suits you best. With variable income, reducing debt provides security that is hard to quantify numerically. If you know you would react badly to a 30 % market drop, the guaranteed overpayment may be the smarter decision even if the numbers say otherwise.

Also factor in early repayment fees. Law 5/2019 caps charges: for variable-rate mortgages, maximum 0.25 % of the repaid capital in the first three years, 0.15 % in years four and five, and nothing from year six onwards. For fixed-rate mortgages, the cap is 2 % in the first ten years and 1.5 % thereafter. Include these costs in your real-saving calculation.

To get maximum value from Pirfila's comparison: go to the mortgage calculator, enter your real mortgage data (outstanding balance, current rate, remaining term) and add the overpayment you are considering; save the report. Then go to the investment calculator, enter the same amount as an initial contribution with a horizon matching your remaining mortgage term; save the report. Finally, open this comparison, select both reports, and observe the break-even year and wealth evolution.

Remember that a 1 % change in expected return can shift the break-even year by several years. Experiment with different assumptions to understand the range of possible outcomes before making a decision.