According to Spain’s National Statistics Institute (INE), 26.4% of households were living in a mortgaged home. Being a mortgage holder is therefore quite common.
If you have some liquidity left at the end of the month, it’s normal to wonder:
Should I pay down my mortgage or invest that money for the future?
This is one of the most common—and also one of the most complex—financial decisions. The answer depends on several factors: your mortgage interest rate, your goals, your risk tolerance, and your time horizon.
That said, probably the most decisive factor is your own perception of what it means to feel financially comfortable.
Let’s take a look at the key factors.
Making early repayments on your mortgage (either reducing the term or the installment) allows you to:
- Reduce the total interest paid.
- Free yourself sooner from long-term debt.
- Obtain a “guaranteed” return equivalent to your mortgage interest rate.
For example, if your mortgage rate is 3%, paying it down is equivalent to earning a “safe” 3% return. In Spain, early repayment fees are legally capped and are usually very low or nonexistent.
From a financial standpoint, it makes more sense to repay early at the beginning of the mortgage, since interest weighs more heavily in the first years. Though, ironically, this is often the hardest period to do so.
It’s also financially better to reduce the term rather than the monthly payment, although the latter does bring psychological relief by lowering your monthly outlay.
Why investing might be more efficient
Investing your money, especially over the long term, allows you to:
- Seek potential returns higher than the cost of your mortgage.
- Harness the compounding effect of interest.
- Maintain liquidity and therefore financial flexibility.
- Defer taxation if you use investment funds or index portfolios like those offered by inbestMe.
Historically, a diversified portfolio like those of inbestMe has delivered average annual returns of 3.5% to 7% in the long term.
Given current mortgage interest rates, those returns could exceed the financial cost of your mortgage, though with greater volatility.
That’s why, before investing, it’s advisable to have an emergency fund, so that volatility doesn’t force you into rash decisions and you can stick to your investment plan over time.
What if you do both?
A smart option could be to split your liquidity: make partial repayments on your mortgage (especially if the rate is high and preferably by shortening the term) while putting the rest into an investment portfolio tailored to your goals.
This way you get the best of both worlds, albeit partially.
Finding the mathematically optimal split (see tax aspects below) may be worthwhile, but in practice the most important thing is whatever makes you feel more comfortable or freer financially.
Tax advantages of keeping or reducing a mortgage
It depends on when you bought your primary residence:
- Before January 1, 2013: you can deduct 15% of what you’ve paid (installments or repayments) up to €9,040 per year per person. That means up to €1,356 in annual tax savings per holder, making it attractive to keep part of the mortgage outstanding to continue benefiting from the deduction.
So, if you’re in this situation, it may be worth repaying only up to the deduction limit, leaving part of the principal unpaid to maximize the benefit over more years.
On the flip side, if what you pay annually is below that maximum, you may want to repay enough to reach it and optimize the annual tax deduction.
- From 2013 onward: the deduction was eliminated. There are no tax advantages to keeping your mortgage, so the decision should be based purely on financial considerations.
What should you consider?
In summary, the most important factors to weigh are:
| Factor | Paying off mortgage | Investing |
| Interest rate | The higher it is, the better to repay | The lower it is, the more sense investing makes |
| Time horizon | Irrelevant | Requires long-term (>5 years) |
| Risk profile | Conservative | Requires tolerance for volatility |
| Taxation | Possible deduction if purchased before 2013 | Tax deferral on gains with investment funds |
| Financial capacity (liquidity) | Reduced when repaying | Maintained when investing |
Conclusion: mortgage repayment vs. investing
There is no single answer.
Repaying can bring peace of mind and guaranteed savings in the form of reduced interest. In general, lowering debt is always advisable.
Keeping a reasonable amount of mortgage debt can be a smart choice, especially if the rate is low.
Investing and maintaining liquidity can provide greater growth potential and a sense of financial freedom. Leaving aside tax aspects (which affect fewer and fewer people), it ultimately depends on your goals, your mortgage cost, and your investor profile.
It’s about finding your financial well-being, or your personal balance between:
- being healthily indebted: a manageable mortgage that makes you feel at ease, and
- enjoying some financial freedom: keeping a minimum level of liquidity and growth potential.
If you analyze it, both approaches make sense.
You must decide the balance between them. As mentioned at the beginning, it’s tied to your own perception of what it means to feel financially comfortable.
At inbestMe, we help you analyze your situation and build a portfolio optimized for you.
You set the pace, we help you along the way.
