Pay off the mortgage early or invest your savings – what does the calculator say?
If a person’s account is accumulating increasing amounts of money each month and they have a mortgage at the same time, the question arises whether it is worth paying off part of the mortgage early or whether it is better to invest these additional funds instead. What do experts and their prepared calculator say about this?
Tomas Sovijus Kvainickas, Head of Investments and Analysis at the "Inreal" group, notes that early repayment of a mortgage is usually not worthwhile. This is because, in the long term, returns from investments are typically higher than the interest paid on a mortgage.
“Mortgages are essentially the cheapest source of borrowed money available to the residents. They provide an opportunity to increase one’s capital due to the difference between housing price growth and the interest rate. Maintaining this leverage is generally beneficial for the borrower,” notes the Head of Investments and Analysis at the "Inreal" group. According to him, this is related to the perception of debt risk. A mortgage is issued against property of greater value than the loan (up to 85% of the property’s value is lent).
The loan-to-value ratio decreases steadily as payments are made, so the creditor is protected from losses if the borrower becomes insolvent. When the loan risk is low, the interest rate is also low.
Currently, mortgage interest rates in Lithuania have increased because the EURIBOR rate has settled at around 4%. After banks recalculated the interest rates, mortgage payments have increased significantly. Although last year many economists predicted that EURIBOR would decrease by this spring, optimism has waned significantly as the year has begun, leading many mortgage holders to consider whether it is worth repaying part of the loan early.
What the Calculator Shows
The calculator developed by "Inreal" and "Röntgen" shows that in cases where the expected return on investments exceeds the interest paid on the mortgage, it is more profitable to invest rather than repay the mortgage early.
For example, a person has already accumulated 10,000 EUR in savings and can save another 500 EUR per month. In this case, one could invest 40,000 EUR over five years (the already accumulated 10,000 EUR and an additional 30,000 EUR saved at 500 EUR per month). If the annual return on such investments is 8%, the investor would earn 11,636 EUR.
If the mortgage interest rate is 6%, and the person allocates 40,000 EUR to repay the mortgage early under the same conditions, one would save 8,373 EUR in interest payments. In other words, by choosing to invest rather than repay part of the mortgage, one would earn an additional 3,263 EUR over 5 years (11,636 EUR - 8,373 EUR).
We can also consider other assumptions. Suppose the long-term mortgage interest rate is expected to be 3%, and the long-term return on investments is 8%. Then, by choosing to invest rather than repay the mortgage, the person would earn 7,697 EUR over five years (11,636 EUR - 3,939 EUR). However, if things do not go as planned and, for example, the return on investments in our example is 5%, while the mortgage interest rate is 6%, they would incur a loss of 1,536 EUR over 5 years. The mentioned calculator allows you to assess all other scenarios and calculate sums close to each person’s actual situation.
It is important to note that the calculator may have a slight margin of error, as it includes the assumption that the mortgage amount saved decreases monthly. In reality, the saved amount would be deposited less frequently – every three, six, or twelve months – depending on when the EURIBOR is recalculated, as banks usually allow the deposit of the saved amount for free on these dates.
Greater Liquidity
T. S. Kvainickas notes that it is also important to consider the liquidity of assets: if money is needed suddenly, investments can generally be sold faster than real estate.
“Investing independently provides more freedom. For example, if you use all your savings and investments to repay your mortgage, and later decide to buy a summer house, there is no guarantee that the bank will offer a loan under better terms than the one you’ve repaid. A summer house is considered a less valuable collateral compared to a city home. The borrowing period might also be limited by the borrower’s age. On the other hand, if you invest your free funds, you could cover part of the summer house’s cost from the investments, and a loan for the summer house may not be needed or would be smaller,” says T. S. Kvainickas.
He also points out that, over the years, mortgages lose value. Over 10 or more years, due to inflation and the wage spiral, prices and income levels worldwide and in Lithuania increase, while the principal mortgage amount (excluding interest) is fixed, meaning its real burden diminishes over time. Meanwhile, investing with compound interest can grow savings even faster.
“It’s important to remember that although the liquidity of stocks and bonds is higher than real estate, higher returns are also associated with higher risk. Daily fluctuations in value can lead to lower asset values over certain periods, so it’s always worth keeping some funds in cash or in a bank account,” T. S. Kvainickas advises.
Investors Become the Bank Themselves
“Today, a mortgage costs most people around a 2% margin plus EURIBOR. Our crowdfunding platform targets a return of 6-8% plus EURIBOR. This means that free investable money earns more than would be saved by repaying a mortgage,” compares Greta Zarembien?, Partner and Head of Investor Relations at the crowdfunding platform Röntgen. According to her, the myth that only those without financial obligations invest is false.
“Even those who have the entire amount needed for an apartment in their account still take out a mortgage because they can employ their capital with a much higher return. Despite the increased EURIBOR, a mortgage remains one of the cheapest sources of capital, so experienced investors are in no hurry to give it up,” G. Zarembien? points out.
Although Röntgen does not collect statistics on the financial obligations of its investors, the lending platform sees a growing activity among both small and large investors. This indicates that they want to capture the increased returns and trust the security measures applied on the Röntgen platform – real estate collateral with significant value reserves.
“In a sense, our investors become the bank themselves – valuable and liquid assets are pledged in their favor, and noticeably increased interest is earned. Among those taking advantage of this opportunity are many who themselves have mortgages, and their math is simple: even if the EURIBOR plus the bank margin has risen to 6%, investing in real estate-backed loans currently offers an 8-12% annual return,” says G. Zarembien?. She also notes that having a small amount of free capital – a few hundred or a few thousand euros – and using it to reduce the mortgage will not make a significant impact on monthly payments. However, by starting to invest these funds, over time a substantial savings portion will accumulate, which can be used for various purposes if needed.
“Everyone, of course, has to decide based on their values, priorities, calculations, and tolerance for the risk associated with any investment. I fully understand those who feel more comfortable with smaller obligations. However, in the long run, consistent and continuous investment in time-tested instruments far outperforms saving or inflation. Therefore, even a few hundred euros can be an excellent first step into investing,” notes the Röntgen representative.
Pay off the mortgage early or invest your savings – what does the calculator say?
If a person’s account is accumulating increasing amounts of money each month and they have a mortgage at the same time, the question arises whether it is worth paying off part of the mortgage early or whether it is better to invest these additional funds instead. What do experts and their prepared calculator say about this?
Tomas Sovijus Kvainickas, Head of Investments and Analysis at the "Inreal" group, notes that early repayment of a mortgage is usually not worthwhile. This is because, in the long term, returns from investments are typically higher than the interest paid on a mortgage.
“Mortgages are essentially the cheapest source of borrowed money available to the residents. They provide an opportunity to increase one’s capital due to the difference between housing price growth and the interest rate. Maintaining this leverage is generally beneficial for the borrower,” notes the Head of Investments and Analysis at the "Inreal" group. According to him, this is related to the perception of debt risk. A mortgage is issued against property of greater value than the loan (up to 85% of the property’s value is lent).
The loan-to-value ratio decreases steadily as payments are made, so the creditor is protected from losses if the borrower becomes insolvent. When the loan risk is low, the interest rate is also low.
Currently, mortgage interest rates in Lithuania have increased because the EURIBOR rate has settled at around 4%. After banks recalculated the interest rates, mortgage payments have increased significantly. Although last year many economists predicted that EURIBOR would decrease by this spring, optimism has waned significantly as the year has begun, leading many mortgage holders to consider whether it is worth repaying part of the loan early.
What the Calculator Shows
The calculator developed by "Inreal" and "Röntgen" shows that in cases where the expected return on investments exceeds the interest paid on the mortgage, it is more profitable to invest rather than repay the mortgage early.
For example, a person has already accumulated 10,000 EUR in savings and can save another 500 EUR per month. In this case, one could invest 40,000 EUR over five years (the already accumulated 10,000 EUR and an additional 30,000 EUR saved at 500 EUR per month). If the annual return on such investments is 8%, the investor would earn 11,636 EUR.
If the mortgage interest rate is 6%, and the person allocates 40,000 EUR to repay the mortgage early under the same conditions, one would save 8,373 EUR in interest payments. In other words, by choosing to invest rather than repay part of the mortgage, one would earn an additional 3,263 EUR over 5 years (11,636 EUR - 8,373 EUR).
We can also consider other assumptions. Suppose the long-term mortgage interest rate is expected to be 3%, and the long-term return on investments is 8%. Then, by choosing to invest rather than repay the mortgage, the person would earn 7,697 EUR over five years (11,636 EUR - 3,939 EUR). However, if things do not go as planned and, for example, the return on investments in our example is 5%, while the mortgage interest rate is 6%, they would incur a loss of 1,536 EUR over 5 years. The mentioned calculator allows you to assess all other scenarios and calculate sums close to each person’s actual situation.
It is important to note that the calculator may have a slight margin of error, as it includes the assumption that the mortgage amount saved decreases monthly. In reality, the saved amount would be deposited less frequently – every three, six, or twelve months – depending on when the EURIBOR is recalculated, as banks usually allow the deposit of the saved amount for free on these dates.
Greater Liquidity
T. S. Kvainickas notes that it is also important to consider the liquidity of assets: if money is needed suddenly, investments can generally be sold faster than real estate.
“Investing independently provides more freedom. For example, if you use all your savings and investments to repay your mortgage, and later decide to buy a summer house, there is no guarantee that the bank will offer a loan under better terms than the one you’ve repaid. A summer house is considered a less valuable collateral compared to a city home. The borrowing period might also be limited by the borrower’s age. On the other hand, if you invest your free funds, you could cover part of the summer house’s cost from the investments, and a loan for the summer house may not be needed or would be smaller,” says T. S. Kvainickas.
He also points out that, over the years, mortgages lose value. Over 10 or more years, due to inflation and the wage spiral, prices and income levels worldwide and in Lithuania increase, while the principal mortgage amount (excluding interest) is fixed, meaning its real burden diminishes over time. Meanwhile, investing with compound interest can grow savings even faster.
“It’s important to remember that although the liquidity of stocks and bonds is higher than real estate, higher returns are also associated with higher risk. Daily fluctuations in value can lead to lower asset values over certain periods, so it’s always worth keeping some funds in cash or in a bank account,” T. S. Kvainickas advises.
Investors Become the Bank Themselves
“Today, a mortgage costs most people around a 2% margin plus EURIBOR. Our crowdfunding platform targets a return of 6-8% plus EURIBOR. This means that free investable money earns more than would be saved by repaying a mortgage,” compares Greta Zarembien?, Partner and Head of Investor Relations at the crowdfunding platform Röntgen. According to her, the myth that only those without financial obligations invest is false.
“Even those who have the entire amount needed for an apartment in their account still take out a mortgage because they can employ their capital with a much higher return. Despite the increased EURIBOR, a mortgage remains one of the cheapest sources of capital, so experienced investors are in no hurry to give it up,” G. Zarembien? points out.
Although Röntgen does not collect statistics on the financial obligations of its investors, the lending platform sees a growing activity among both small and large investors. This indicates that they want to capture the increased returns and trust the security measures applied on the Röntgen platform – real estate collateral with significant value reserves.
“In a sense, our investors become the bank themselves – valuable and liquid assets are pledged in their favor, and noticeably increased interest is earned. Among those taking advantage of this opportunity are many who themselves have mortgages, and their math is simple: even if the EURIBOR plus the bank margin has risen to 6%, investing in real estate-backed loans currently offers an 8-12% annual return,” says G. Zarembien?. She also notes that having a small amount of free capital – a few hundred or a few thousand euros – and using it to reduce the mortgage will not make a significant impact on monthly payments. However, by starting to invest these funds, over time a substantial savings portion will accumulate, which can be used for various purposes if needed.
“Everyone, of course, has to decide based on their values, priorities, calculations, and tolerance for the risk associated with any investment. I fully understand those who feel more comfortable with smaller obligations. However, in the long run, consistent and continuous investment in time-tested instruments far outperforms saving or inflation. Therefore, even a few hundred euros can be an excellent first step into investing,” notes the Röntgen representative.
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