What this calculator compares
You have money left over and two obvious options. You can use it to lower the outstanding balance on your mortgage, or you can put the same amount into an ETF. Both improve your wealth, but in different ways.
The overpayment saves you a loan interest rate that is known from the contract. That is the predictable part. The ETF gives you the chance of a return, but it fluctuates and is taxed when you sell. That is exactly why the sentence “Seven percent is more than three and a half percent” is not enough for the comparison.
The calculator compares the same amount over the same period. It shows the calculated value of the overpayment, the ETF value before and after tax and the difference between the two paths. A positive difference means that the ETF comes out higher after tax in the model you entered. A negative value means that the overpayment comes out higher. This does not yet amount to a personal decision, because liquidity and risk are not part of the figure.
How the value of the overpayment comes about
I treat the avoided loan interest like a safe return. With a $20,000 overpayment and a 3.5% loan interest rate, the economic comparison value after ten years is $28,211.98 in the model. The amount consists of the $20,000 repaid and $8,211.98 of avoided interest effect.
This compounding makes both paths comparable. With the ETF, there is a portfolio value at the end. With the overpayment, there is no portfolio next to it, but a lower outstanding balance and a lower interest burden. Both are therefore brought to the same end date.
The model is deliberately simpler than a full repayment schedule. A real loan changes its outstanding balance with every installment. Some contracts shorten the term through the overpayment, others change the installment later. The calculator also assumes that the loan interest rate stays economically relevant over the comparison period. If the fixed-rate period ends earlier, you need to adjust the period or calculate several scenarios.
How the ETF is calculated after tax
For the ETF, I first deduct the ongoing fund costs from the expected gross return. A 7% expected return and 0.20% TER become 6.80% a year. $20,000 thus grows to $38,613.80 before tax after ten years. The gain is $18,613.80.
The calculator then applies one simplified tax to this gain: the gain times the rate you enter. The preset of 15% is only an example. At 15%, the tax in the example comes to $2,792.07. After tax, $35,821.73 remains. Compared with the value of the overpayment, the ETF in the model therefore comes out $7,609.75 higher.
How gains are taxed depends on the country you live in. Some countries tax only the gain on sale, some tax part of the gain every year, some grant allowances or exempt certain funds. Enter the rate that applies to you, or 0 if the gain is tax-free. The calculation acts as if you sell the entire ETF at the end and leaves out taxes during the holding period.
Why the loan interest rate is not compared one to one with the ETF return
The overpayment saves interest without market fluctuation. In the model, this saving is not taxed. The ETF, on the other hand, first has to earn its return, bear ongoing costs and pay tax on a positive gain from the sale.
With $20,000 and ten years, the ETF value after tax in the example calculation always stays the same as long as you only change the loan interest rate in the table. The overpayment, by contrast, rises from $23,210.82 at 1.5% to $34,162.89 at 5.5%. The gap gets smaller with every percentage point.
The exact break-even point is still no magic decision threshold. Two return paths can have the same average and feel completely different. If the ETF falls sharply shortly before the planned end, its actual value can lie below the smooth model curve. The saved loan interest knows no such price risk.
Three scenarios instead of one nice number
First calculate with a cautious ETF return. Then take a middle assumption and finally a higher one. With $20,000, ten years, a 3.5% loan interest rate, 0.20% TER and 15% tax on the gain, the difference looks like this:
| ETF return before costs | ETF value after tax | Gap to the overpayment |
|---|---|---|
| 3% | $25,406.81 | -$2,805.16 |
| 5% | $30,168.26 | $1,956.28 |
| 7% | $35,821.73 | $7,609.75 |
The range is the real information. At 3%, the overpayment comes out ahead in the model, at 7% the ETF does. Nobody knows today what the ETF will be worth in ten years. The loan interest rate of your current contract, on the other hand, you do know.
Then calculate with different periods. An ETF needs time to be able to recover interim losses. An overpayment takes effect from the day it reduces the outstanding balance. If your fixed-rate period only has four years left to run, a calculation over twenty years without a follow-up interest rate says little.
Liquidity has a value of its own
An overpayment does not disappear. Afterwards it sits in your property as a lower debt. But you cannot get it back without a new loan. An ETF can in principle be sold, but its price may be low at exactly that moment. Both are less liquid than money in a savings account, only for different reasons.
That is why the emergency fund comes before the comparison. Repairs, a period without income or an unexpected tax bill must not force you to sell ETF shares at a loss or to take out an expensive loan. Only enter the amount above that is really left after this buffer.
What the loan agreement decides
The fields in the calculator cannot create a right to make overpayments. The contract states whether you may pay a fixed amount once a year, a percentage of the original loan amount or nothing extra at all. Also check whether an option you do not use carries over to the following year.
A full early repayment often follows different rules than the overpayment agreed in the contract, and the lender may charge an early repayment fee for it. Before you make a payment, get confirmation of how the lender will book it and what effect it has on the installment and the term.
Why a rented-out property needs its own calculation
The calculator is tailored to a home you live in yourself. In many countries, loan interest on a rented-out property can be deducted from the rental income. An overpayment then lowers the interest payment, and possibly the tax deduction as well. The effective loan interest rate after tax can therefore be lower than the contractual rate.
For this case it is not enough to roughly reduce the loan interest rate. Your personal tax rate, the type of use and the allocation of the loan all play a part. That belongs in an individual tax calculation.
How to use the result
First check whether the available amount and the overpayment allowed by your contract really match. Then calculate at least three ETF returns and two periods. Enter the tax rate that applies to your gains. If you are unsure, calculate with a low and a high rate.
Finally, write three values side by side: the certain interest saving, the possible ETF range and the liquidity you keep in both cases. The calculator delivers the first two figures. How much fluctuation you can bear and when you need to access the money again, it cannot decide for you.