Question 1

So should I prepay or invest?

Accepted Answer

That depends on a number nobody has, which is what your investments will actually return. What this page can tell you is the hurdle: the return investing has to beat for it to have been the better choice. Above it investing wins, below it prepaying does. Anyone who answers the question without naming that figure is presenting a forecast as a fact.

Question 2

Why not just tell me which is bigger?

Accepted Answer

Because the two figures are not the same kind of number. The prepayment saving is certain: it is the interest you stop paying, at a rate written into your loan agreement. The investment figure is a projection at a rate you supplied. Putting them side by side and circling the larger one would be comparing a guarantee with a hope, which is exactly the mistake this page exists to avoid.

Question 3

Why is the hurdle lower than my loan rate?

Accepted Answer

Two tax effects pull in opposite directions and the hurdle is where they land. Interest on a home loan may earn you a deduction, which makes the loan cheaper than its headline rate and lowers what investing must beat. Gains on investments are taxed, which raises it. Set both to zero and the hurdle is simply your loan rate, which is the cleanest way to see what prepaying really returns.

Question 4

Why is buying more house not ranked with the others?

Accepted Answer

Because it is not a return on the surplus. Prepaying and investing both turn money into more money. A larger deposit turns money into a larger asset and a larger loan at the same time, and whether that leaves you better off depends on what property prices do, which is another forecast. Ranking it beside the other two would suggest a comparison that cannot honestly be made.

Question 5

Why would part of my surplus buy no house at all?

Accepted Answer

Because a lender caps the loan at a share of your income, not at the size of your deposit. Once your deposit is large enough to reach that cap, adding to it does nothing: you cannot borrow more against the same salary. The page splits the surplus into the part that moves the price and the part that does not, because the total on its own would flatter the option.

Question 6

Does this account for how safe each option feels?

Accepted Answer

No, and it cannot. Having no loan is worth something real to a lot of people and no arithmetic reaches it. Nor is there a risk adjustment on the investing figure, because whatever number we chose would be ours rather than yours. The hurdle is the honest handover: it tells you what you are betting on, and leaves the bet to you.

Prepay, Invest, or Buy More House?