Compound interest: the power of investing vs buying a home

Compound interest: the hidden engine behind the buy or rent decision

When people discuss whether to buy or rent, the conversation often revolves around emotions: security of owning vs freedom of renting. But behind this choice sits one hard numerical driver: your investment rate, i.e. the annual return you can realistically expect if you stay a tenant and invest your spare cash.

With mortgage rates currently around 3.6% in many European markets, the real question is no longer only “can I buy?”, but also “can the compound interest from my investments beat the long‑term return of owning my home?”. The answer depends on your situation, your time horizon and the parameters you use in a simulator like buy-or-rent.net.

Quick reminder: what is compound interest?

Simple interest is calculated only on your initial capital. Compound interest is calculated on:

• your initial capital, plus
• all the interest already earned in previous years.

Mathematically, if you invest a capital C at an annual investment rate r for n years, the future value is:

Future value = C × (1 + r)ⁿ

With regular contributions (for example, the monthly saving you achieve by renting instead of buying), the snowball effect becomes even stronger.

A simple compound interest example

Assume:

• Initial capital: €10,000
• Investment rate: 5% per year
• Duration: 25 years

Without any additional payments:

• Future value ≈ 10,000 × (1.05)²⁵ ≈ €33,860

Your €10,000 has more than tripled thanks to compound interest alone. Add monthly contributions (say €300/month), and the gap becomes dramatic.

Where does the investment rate fit into buy or rent calculations?

In a serious buy or rent simulator, you are essentially comparing two strategies:

• Strategy A – Buy: you pay mortgage instalments (at ~3.6%), notary fees (7–8% for existing property, 2–3% for new build), property tax, borrower insurance (0.25–0.45%), maintenance, and possibly renovation works.
• Strategy B – Rent: you pay rent (which rises with inflation or a rent index), but you can invest:

• the down payment you would have used to buy, and
• any monthly difference between a mortgage payment and your rent.

The taux_placement parameter in the simulator is exactly this investment rate: the annual return on the capital you invest instead of tying it up in property. The higher this rate, the more competitive the “rent + invest” strategy becomes against buying.

Numerical example: buying or renting a €300,000 apartment

Let’s use a simplified case to isolate the effect of compound interest. All figures are indicative and not personalized advice.

Common assumptions

• Property price: €300,000
• Time horizon: 25 years
• Average inflation: 2% per year
• Property market: assumed average growth of 1.5%/year (not guaranteed)

Scenario 1: you buy

• Down payment: €60,000 (20%)
• Mortgage amount: €240,000
• Mortgage rate: 3.6% (excluding insurance)
• Term: 25 years
• Borrower insurance: 0.3%/year on initial capital
• Notary fees (existing property): 8% of price, i.e. €24,000
• Agency fees: 4%, assumed included in the €300,000 for simplicity
• Property tax: €1,200/year initially, +2%/year (property tax increase)
• Maintenance/renovation: 1% of property value per year on average (€3,000/year)

Approximate monthly mortgage payment

For €240,000 at 3.6% over 25 years, the monthly payment (excluding insurance) is roughly:

• Monthly payment ≈ €1,220

Borrower insurance: 0.3% × 240,000 = €720/year ≈ €60/month.

Total mortgage + insurance ≈ €1,280/month

On top of that, roughly at the start:

• Property tax: €1,200/year ≈ €100/month (then +2%/year)
• Maintenance: €3,000/year ≈ €250/month (average)

Total initial monthly cost of ownership ≈ €1,630

And remember the €60,000 down payment + €24,000 notary fees locked in from day one.

Scenario 2: you rent and invest the difference

• Initial rent: €1,050/month
• Annual rent increase: 2% (roughly in line with long‑term inflation/rent index)
• No property tax to pay as a tenant
• Limited maintenance (minor tenant expenses, ignored here for simplicity)

Compared to the total ownership cost (€1,630/month), you save initially:

• Monthly saving ≈ 1,630 – 1,050 = €580

You also keep your €60,000 down payment and avoid the €24,000 notary fees. Suppose you invest:

• Initial capital: €84,000 (60,000 + 24,000)
• Monthly contribution: €580

This is where compound interest and the taux_placement (investment rate) become critical.

Scenario with a low investment rate: 2%/year

If you choose very conservative investments (cash accounts, capital‑guaranteed funds), you might target an annual investment rate around 2% before tax.

Capital after 25 years as a renter

• Initial capital: €84,000
• Monthly contribution: €580
• Investment rate: 2%/year
• Duration: 25 years

Approximate results:

• Initial capital at 2% for 25 years: 84,000 × (1.02)²⁵ ≈ €137,700
• Monthly contributions: €580/month = €6,960/year. Over 25 years at 2%, this grows to roughly €220,000–230,000

Order of magnitude: final capital ≈ €360,000.

Value of the property if you had bought

With property prices growing at 1.5%/year for 25 years:

• Future value ≈ 300,000 × (1.015)²⁵ ≈ €404,000

You would own your home outright (mortgage fully repaid). Comparison:

• Buying: a property worth ≈ €404,000, but you have paid interest, property tax (rising), maintenance, insurance, etc. for 25 years.
• Renting + investing at 2%: a financial portfolio ≈ €360,000, but no home ownership.

With a low investment rate, buying tends to look better financially, especially if property prices outpace inflation. But this is not a universal rule: it still depends on inflation, rent growth, property tax, and how consistently you invest.

Scenario with a higher investment rate: 5%/year

If you accept more risk (for example, a portfolio with a significant share of global equity ETFs over the long term), a taux_placement of 5%/year is a common modelling assumption. Important: such performance is neither guaranteed nor smooth.

Capital after 25 years at 5%

• Initial capital: €84,000
• Monthly contribution: €580
• Investment rate: 5%/year
• Duration: 25 years

Approximate results:

• Initial capital: 84,000 × (1.05)²⁵ ≈ €284,000
• Monthly contributions: €580/month ≈ €6,960/year. At 5% over 25 years, this can reach ≈ €340,000–360,000

Order of magnitude: final capital ≈ €620,000.

Comparison after 25 years:

• Buying: property ≈ €404,000 (plus all ownership costs paid over time).
• Renting + investing at 5%: financial assets ≈ €620,000, but still a tenant.

With a stronger investment rate, compound interest can outperform home equity, even assuming some property price growth. But again, this depends on market risk, your investment behaviour and future conditions.

Inflation, rents and property tax: forces that shape the result

Compound interest does not work in isolation. In a realistic buy or rent simulation, several other parameters interact with the taux_placement:

Annual inflation

Inflation of 2–4%/year erodes the real value of:

• your fixed mortgage payments (they feel lighter over time),
• your rent (which increases with rent indices),
• your investments (which is why, in the long run, your investment rate should ideally beat inflation).

Annual rent increase

If your rent follows an index and grows by 2%/year, it may eventually catch up with or even exceed the cost of a mortgage. In our example:

• Initial rent: €1,050/month
• After 25 years at +2%/year: ≈ €1,725/month

At the same time, the owner has no mortgage payment after 25 years, though they still pay property tax and maintenance.

Property tax increase

Property tax can rise faster than inflation in some cities. A 2–3% annual increase over 25 years can add up to tens of thousands of euros. A good buy or rent simulator includes this reassessment because it materially impacts the true cost of ownership.

Compound interest vs. mortgage amortization

Opposite compound interest on financial assets, real estate has its own mechanism: mortgage amortization. Each loan payment includes:

• an interest component (linked to the 3.6% mortgage rate in our example), and
• a principal component, which increases over time.

At the beginning, you mostly pay interest; later, you mostly repay principal. Your net housing equity grows gradually, acting like a forced savings plan. But unlike a diversified portfolio, this equity is concentrated in a single asset: your home, in one geographical market, with its own local risks.

Using the taux_placement parameter in a buy or rent simulator

On buy-or-rent.net, the taux_placement (investment rate) parameter lets you test different profiles:

• Conservative: 1–2% (cash savings, high‑quality bonds, guaranteed funds).
• Balanced: 3–4% (mixed bond/equity portfolio, diversified insurance products).
• Dynamic: 5–6% (significant equity ETF exposure over the long run, with volatility).

By adjusting this rate, you can see how the “rent + invest” strategy stacks up against buying your home. You can also change:

• the mortgage rate (e.g. around 3.6% currently, but subject to change),
• notary fees (7–8% for existing, 2–3% for new build),
• annual rent increase (linked to rent indices),
• property tax level and yearly reassessment,
• renovation costs (especially energy upgrades driven by energy ratings),
• borrower insurance rate (0.25–0.45%),
• early repayment penalties (often capped at 3% or six months of interest).

The goal is not to get a single “right” answer, but to understand under which conditions compound interest on financial investments can offset, or even exceed, the benefits of home ownership.

Investing vs buying: some numerical benchmarks

Without giving personalized financial advice, a few broad rules of thumb can help frame the question:

• If your long‑term net investment rate remains well below the real cost of your mortgage (mortgage rate + insurance – inflation), buying tends to be more attractive, all else equal.
• If your taux_placement clearly exceeds that cost and you consistently invest the full difference between rent and mortgage payments, renting can compete with or even outperform buying over 20–30 years.
• The impact of property tax, renovation and maintenance, and rent increases can tilt the balance either way.

On top of the numbers, there are non‑financial factors: stability, flexibility, risk tolerance, life plans. The right answer to the buy or rent question will always depend on your overall situation.

Conclusion: let compound interest speak, through the simulator

Compound interest is a powerful force, capable of turning a few hundred euros of monthly savings into hundreds of thousands over 25 years. In the buy or rent debate, ignoring your investment rate and its compounding effect means ignoring half of the equation.

On the other hand, overestimating future returns or underestimating market risk can push you towards renting when buying might have been more protective. There is no universal answer: it depends on your personal situation, assumptions and investing behaviour.

The numerical examples in this article are simplified and do not constitute personalized financial advice. To assess your own case — with your rent, income, down payment, time horizon and risk profile — the most effective approach is to simulate different buy or rent scenarios by adjusting the taux_placement and other key parameters.

Want to see, with real numbers, how compound interest could change your own buy or rent decision? Simulate your situation on buy-or-rent.net