Should I pay off my home loan early, or invest the money?

The short answer: there's no single right answer. If your home loan's interest rate is low, investing at least part of the money has historically had more potential over the long run. But if being loan-free would let you sleep better at night, paying it off is a perfectly good decision, and many people do a bit of both.

A reader wrote to me with a problem most people would love to have. He's 30. He had just inherited enough money to clear the home loan he and his wife took out five years ago. All of it.

"Just thinking about it feels incredible," he wrote. No monthly repayment. No 25 more years of instalments. And yet he couldn't decide. Because over the past few months he had started reading about investing, and a quiet voice kept asking: what if this money could do more?

So which is it? Pay off the house, or invest?

Firstly, paying off your home is never a bad decision

Let me say this clearly, because people often expect me to say the opposite. Owning your home outright is a wonderful feeling. Your monthly costs drop. Your stress drops. And you can never lose your home to a repayment you can't make.

If being loan-free has always been your main financial goal, and you know you'd sleep better, then go for it. Money is supposed to serve your life, not the other way round.

Having said that, here's the case for investing

Home loans in Malta tend to carry relatively low interest rates. When the money you'd use to clear the loan could potentially grow faster than the interest you're paying, keeping the loan and investing has historically had more upside over the long term.

Take the S&P 500, the index of America's largest listed companies. Over the past several decades it has averaged roughly 8% to 10% a year. Does that mean 8% to 10% every year? Not at all. Some years it fell hard. Others it jumped. But over long periods, the average held.

And at 30, you have something money can't buy: time.

Why time matters more than the amount

Meet Paul and Laureen. Both invest €2,400 a year. The only difference is when they start.

• Paul starts at 21 and stops at 29. He puts in €21,600 in total. At 67 he has about €558,000.
• Laureen starts at 30 and keeps going until 66. She puts in €88,800 in total. At 67 she has about €526,000.

Paul invests four times less and still ends up ahead, simply because his money had nine extra years to grow. That's compound growth: your returns start earning returns of their own.

Illustration only. It assumes a steady 8% a year, which markets never deliver in a straight line, and ignores fees, tax and inflation.

The middle road most people miss

It doesn't have to be all or nothing. You could pay off a large chunk of the loan and ask your bank to lower your monthly repayment, keeping the same term. Your monthly bill shrinks, you feel lighter, and you keep money aside to start investing.

And if you do invest, there's no need to throw it all in on one day. Many people put in a fixed amount every month instead. It's called dollar-cost averaging, and it makes the ups and downs of the market far easier to live with.

Five questions to ask yourself before you decide

• What interest rate am I actually paying on my home loan?
• Do I have three to six months of expenses saved as an emergency fund, separate from this money?
• How would I honestly feel if my investments dropped by 20% in a single year?
• Can I leave this money invested for at least ten years?
• What does my partner want? (This one matters more than the maths.)

Endings matter. So here's mine. The right answer isn't the one with the biggest number at age 67. It's the one you and your partner can live with, calmly, for the next thirty years.

Frequently asked questions

Is it smart to pay off a home loan early in Malta?

It can be, especially if the loan worries you or your rate is high. If your rate is low and you have a long time horizon, investing part of the money has historically offered more growth potential. Many people do both.

Can I lower my monthly repayment instead of shortening the loan?

Often, yes. Ask your bank whether a partial repayment can reduce the monthly instalment while keeping the same term, and whether any early repayment fee applies.

What is dollar-cost averaging?

Investing a fixed amount at regular intervals, for example every month, instead of all at once. It spreads your entry over time and reduces the impact of investing just before a fall.

Should I invest a large sum all at once?

There's no universal rule. Investing gradually can feel easier if you're new to markets and worried about short-term drops. The most important factor is staying invested long enough.

Want to understand investing properly, in Maltese?

My course Investing Made Simple runs over four live Monday evenings from 11 January. €175 if you book by 31 December, €195 from 1 January.

This article is for education only and is not financial or investment advice. Luca Caruana is a Certified Money Coach (CMC®). Money Coaching Hub does not sell financial products. Based on a reader question first answered in Luca's Money Coach column in the Times of Malta.