Pay down the debt or invest the money

Paying down a debt earns exactly the rate of that debt, no more and no less. The payments you stop making, brought back to today at the rate of the contract itself, add up to precisely the amount you handed over.

So the comparison is one line: a net return above the rate of the debt wins, one below it loses, and at the rate itself the two tie. Simulated month by month over the same term with the same monthly outlay, the crossover falls on the rate of the debt to within ten in over a million.

Because the interest you stop paying is not taxed. Money saved on a debt arrives whole, while money earned on an investment usually arrives with something taken out of it first.

Comparing a gross return against a debt rate stacks the deck in favour of investing, and the gap it invents is exactly the size of the tax.

Those are not the same thing, and the difference is enormous. On the example this page opens with, shortening the term leaves two hundred and forty nine thousand of interest to pay, while lowering the instalment leaves five hundred and sixty six thousand.

That is the same money paid into the same debt, and one choice costs two point two seven times as much interest as the other. It is usually decided by a question the bank asks in passing.

A great deal, because interest is charged on what is still owed. On a thirty year loan, the same amount paid in the first month shortens it by around a hundred and eighty instalments, while paid in the three hundredth month it shortens it by twenty seven.

The rate has not changed and neither has the amount. What changed is how many months of interest that money was still going to be charged.