Prepay the Mortgage or Invest? A Numbers-First Decision

Prepaying 100,000 of principal while keeping the payment unchanged stops that 100,000 from accruing interest. Because interest is charged on the outstanding balance, the effect equals compounding at the mortgage rate.

At 4.2% with 20 years left: 100000 × 1.042²⁰ − 100000 ≈ 128,000. Prepaying 100,000 saves roughly 128,000 of interest over two decades.

The point: that yield is after-tax, risk-free and certain. Almost nothing on the market offers 4.2% on those terms.

• Shorten the term, keep the payment: saves the most because principal falls fastest;
• Lower the payment, keep the term: immediate cash-flow relief but less interest saved;
• Partial prepayment with re-amortisation: somewhere in between, depending on the lender.

For lowest total cost, shorten the term. For monthly breathing room, lower the payment. Do not conflate the two or the comparison collapses.

Comparing a risk-free 4.2% with an equity "historical 8%" is unfair: the latter carries drawdowns, requires time and is uncertain.

The fair comparison is 4.2% risk-free versus the after-tax return you can reliably achieve. If the best you can lock in is 2.5%, prepaying clearly wins. If you hold a low-cost, diversified portfolio and can tolerate volatility, 4.2% is beatable over long horizons.

Add liquidity: prepaid money is usually locked in (unless you refinance), while invested money can be sold. That optionality is hard to price but real.

• Rate ≥ 5% and no reliable after-tax return above it → prepay first, shortening the term.
• Rate 3%–5% with a diversified portfolio and tolerance for volatility → split: some prepayment, some investing.
• Rate ≤ 3% → prepayment is less compelling; keep liquidity.
• In every case: fund six months of expenses before prepaying anything.

• Ignoring prepayment penalties: add the fee back before comparing.
• Treating "interest saved" as "money earned": the saving is certain, but so is the forgone return.
• Draining the emergency fund: a job loss or illness then forces high-interest borrowing.
• Ignoring the remaining term: with 5 years left, the compounding effect is far smaller than with 25.