Overpay the Mortgage or Invest the Difference: the Tax That Decides It

What an overpayment actually returns

An overpayment is the strangest investment most households will ever make, because its return is knowable to the decimal in advance. Put a euro against the principal and the interest that euro would have generated over the remaining term simply does not occur. The return is the loan's interest rate, compounded on the same schedule as the loan, with no default risk, no market risk, no fees, and — this is the part people forget — no tax, because there is no income to tax. The state cannot levy a charge on an expense you avoided.

That last point is what makes the comparison asymmetric, and it is why comparing a mortgage rate with an expected investment return is comparing two different quantities. Your mortgage rate is already net. A fund's advertised return is gross. To put them on the same footing you must take the gross return the investment needs and divide the mortgage rate by one minus the tax you would pay on that return: needed return equals mortgage rate over one minus tax rate. Everything in this article is that one line, applied country by country.

The same mortgage, seven different bars to clear

Take a mortgage at 3.2 %. In an ordinary French securities account the flat tax applies: 12.8 % of income tax under article 200 A of the tax code plus 17.2 % of social levies, thirty per cent in all, so the investment must gross 4.57 % — a premium of 1.37 points over the mortgage rate, paid purely to the tax authority. In Germany the flat withholding is 25 % under section 32d of the income tax act, plus the 5.5 % solidarity surcharge under section 4 of the solidarity surcharge act, which still applies in full to investment income even where it has been dropped elsewhere: 26.375 %, so the bar is 4.35 %. Portugal's special rate under article 72 of the personal income tax code is 28 %, giving 4.44 %. Spain applies a savings scale, half state and half regional, whose combined rates are 19 %, 21 %, 23 %, 27 % and 30 % across bands beginning at 6,000, 50,000, 200,000 and 300,000 euros; the 21 % band gives a bar of 4.05 %.

Read the table below and notice what it does to the usual advice. "Equities beat a mortgage over the long run" may still be true, but the margin it needs is a point and a third larger in France than the raw comparison suggests, and it needs that margin before you have been paid anything for the volatility, the sequence risk or the possibility of needing the money in a bad year. Meanwhile a regulated savings account does not get into the argument at all: the French Livret A is exempt from both income tax and social levies, so its bar is exactly the mortgage rate — but the rate itself has been 1.5 % since 1 February 2026, less than half of it. Exemption is worth nothing if the yield is not there.

Two wrappers that erase the gap, and the ceilings that limit them

Germany's saver's allowance is the cleanest case in this article. Section 20(9) of the income tax act deducts 1,000 euros a year from investment income before the flat tax bites, 2,000 for jointly assessed spouses. Inside that allowance the marginal tax rate on the return is zero, the bar drops to the mortgage rate itself, and the argument for investing needs only a positive risk premium instead of a large one. The ceiling is the whole point: at a 4 % return the allowance covers a portfolio of about 25,000 euros for a single filer, and every euro beyond it is taxed at 26.375 % again. German equity funds get a second, complementary break — a partial exemption of 30 % of the return under the investment tax act, which pulls the effective rate down to about 18.46 % and the bar to 3.92 %.

France's equivalent is the PEA, whose gains escape income tax entirely once the plan is more than five years old, leaving only the 17.2 % social levies. That takes the bar from 4.57 % to 3.86 %, a saving of 0.71 points — real, but not the full exemption the plan is often described as offering, because the social levies are the larger half of the flat tax and they never go away. Both wrappers share the same shape: they help most for the first tranche of money and least for the last, they impose conditions of holding period or eligible assets, and neither turns a losing comparison into a winning one on its own. They shift a decision that was close; they do not decide one that was not.

Two mortgage rules that move the goalposts the other way

Spain has a rule that turns the whole comparison on its head for a shrinking but real group of borrowers. The transitional main-home deduction, kept alive by the eighteenth transitional provision of the personal income tax act for anyone who was already claiming it before 2013, gives 15 % of the amounts paid in the year for the purchase of the habitual residence, on a maximum base of 9,040 euros — and where the purchase was financed, the tax authority is explicit that the deduction is taken as the principal is repaid, not only as interest is paid. An overpayment made within the remaining headroom of that 9,040-euro base therefore earns a certain 15 % in the year it is made, on top of the interest it saves. No investment in this article competes with that.

Italy pushes in the opposite direction. Article 15 of the consolidated income tax act gives a 19 % credit on mortgage interest paid on a loan for the main home, on interest of up to 4,000 euros a year. Because the state is refunding roughly a fifth of the interest inside that ceiling, the interest an Italian borrower actually bears is about four fifths of the contractual rate — so a 3.2 % mortgage costs about 2.6 % net, and an overpayment saves only that smaller amount. The bar the investment has to clear falls accordingly. It is the same mechanism as Spain's running backwards, and together the two illustrate the real rule: what matters is not the mortgage rate but the after-tax mortgage rate, and in the countries where a deduction still exists those two numbers are not the same.

Before any of that: can you even overpay?

Four regimes, four very different answers, and this is the lever the tax discussion usually forgets. In France, article R. 313-25 of the consumer code caps the compensation at the lesser of six months' interest on the repaid capital at the loan's average rate and 3 % of the capital outstanding before repayment — on a 10,000-euro overpayment against 200,000 outstanding at 3.2 %, that is 160 euros against 6,000, so 160 euros is owed, exactly half a year of the interest the repayment saves. In Spain, article 23 of Law 5/2019 caps a variable-rate compensation at either 0.15 % in the first five years or 0.25 % in the first three, the two being mutually exclusive, and only up to the lender's proven financial loss — 15 euros on the same overpayment, and nothing at all outside those windows. Fixed-rate loans there are capped at 2 % in the first ten years and 1.5 % afterwards.

Portugal reverted to charging in 2026. Article 23 of Decree-Law 74-A/2017 caps the commission at 0.5 % of the capital repaid during a variable-rate period and 2 % during a fixed-rate one; the suspension of the variable-rate commission that had run since 2022 for owner-occupied permanent homes ended on 31 December 2025, so a 10,000-euro overpayment that cost nothing in December 2025 costs 50 euros now. Germany is the outlier and the most generous: section 489 of the civil code lets a borrower terminate a fixed-rate loan in whole or in part ten years after full drawdown, with six months' notice, and no compensation is due at all — a right that cannot be excluded or made harder by contract. Before ten years, the position depends on the contractual annual overpayment allowance and on an early-repayment charge. Check which regime you are in before doing any of the tax arithmetic above, because in two of these four countries the answer is that overpaying is free and in one it is not.

What would change this verdict

Three things, and the first is not financial at all. An overpayment is irreversible: you cannot un-repay a mortgage, and money in the walls is not money in an emergency. An investment can be sold, and that option has a value the arithmetic above never prices. Anyone without a funded emergency reserve should treat this entire comparison as premature, because the true alternative to overpaying is not investing — it is being forced to borrow again, expensively, at the worst possible moment. Second, the mortgage rate that matters is the one you actually have: a variable-rate loan makes the return on an overpayment a moving target, and a fixed-rate loan is itself a hedge whose value rises as rates rise, which is an argument for keeping a cheap old fixed loan alive rather than killing it.

The third is that every rate in this article is nominal, and inflation is silently on the borrower's side. A fixed-rate mortgage is a short position in money: the debt is fixed in nominal terms while wages and prices are not, so inflation erodes the real burden of a loan you keep and cannot erode the burden of one you have already repaid. That is not a reason to avoid overpaying — the after-tax bar is the honest comparison and it stands — but it does mean that a borrower with a fixed rate well below current market rates is holding something valuable, and that the arithmetic of destroying it deserves more care than the arithmetic of taking out a new loan.

Frequently asked questions

Does the early-repayment penalty change the answer much?

Less than people fear, because it is a one-off charge against a saving that recurs every year. On a 10,000-euro overpayment against 200,000 outstanding at 3.2 %, the French cap works out at 160 euros, which is exactly half a year of the interest that repayment saves — the overpayment is in profit from month seven onwards. The Spanish variable-rate cap of 0.15 % gives 15 euros, under six weeks of saved interest. Portugal's reinstated 0.5 % gives 50 euros, under two months. The only regime where it genuinely bites is a fixed-rate loan inside its first ten years in Spain or Portugal at 2 %, which is 200 euros, or a German loan before the ten-year mark, where the compensation is computed on the lender's loss rather than capped at a percentage.

Should I shorten the term or reduce the monthly payment?

Shortening the term saves far more interest, because interest accrues on the balance for as long as the balance exists and removing years removes the most expensive part of the schedule. Reducing the payment saves less but buys resilience: a lower fixed obligation is protection against a fall in income, which is exactly the risk an overpayment otherwise increases by converting liquid savings into illiquid equity. Most lenders in these four countries default to shortening the term unless you ask, so if you want the payment reduced instead, say so in writing at the time of the repayment rather than afterwards.

Is the French PEA really tax-free after five years?

It is free of income tax, not free of tax. After five years the 12.8 % income-tax component of the flat tax disappears, but the 17.2 % of social levies remains and is the larger of the two halves. That is why the bar in the table falls from 4.57 % to 3.86 % rather than to 3.20 %: the wrapper removes 44 % of the tax, not all of it. It is still a meaningful advantage, and the plan has a contribution ceiling and a restricted universe of eligible securities, so it is a partial answer to the question rather than a way out of it.

What if my mortgage rate is 1.2 % from a few years ago?

Then the comparison stops being close and the same formula answers it in one step. At 1.2 %, a French ordinary account needs 1.71 % gross, a German account 1.63 %, a Portuguese one 1.67 % — bars that a short-dated government bond or a money-market fund has cleared comfortably at various points since 2023. That is the correct use of the formula: it does not tell you to overpay or invest, it tells you the number an investment must beat, and at a very low mortgage rate that number is easy to beat with something safe. Keeping the cheap debt and holding the cash in a low-risk instrument is a defensible position, and the lower your fixed rate the more defensible it becomes.

Does this change if the property is rented out rather than lived in?

Completely, and in the opposite direction. On a let property the interest is generally a deductible expense against rental income in all four countries, which means the state is already paying a share of it — so the effective rate you save by overpaying is the contractual rate less your marginal rate on that rental income, often a much smaller number. Overpaying a deductible loan destroys a deduction; overpaying a main-home loan in a country with no deduction destroys nothing. This is the single largest structural difference between the two cases, and it is why advice written for owner-occupiers should never be applied to a rental portfolio without redoing the arithmetic.