You’ve got a little extra money left over each month. It’s a nice position to be in – but it creates a surprisingly difficult question:
Should you use it to pay off your mortgage faster, or invest it for the future?
Overpaying the mortgage has an obvious appeal. Every extra pound reduces your debt and could save you interest.
Investing is different. Your money has the potential to grow over the longer term, but there are no guarantees and its value will fluctuate along the way.
So which should you choose?
Unfortunately, there isn’t a simple answer.
Your mortgage rate, attitude to investment risk, cash reserves, tax position, timescale and wider financial goals can all influence the decision.
And sometimes the answer isn’t one or the other.
Start with your mortgage interest rate
Your mortgage rate is a useful place to start because overpaying gives you a relatively straightforward financial benefit.
If your mortgage rate is 5%, for example, reducing the outstanding balance means you’re no longer paying 5% interest on the amount you’ve repaid.
Compare that with investing.
You might reasonably expect a diversified investment portfolio to grow over a long period, but unlike the mortgage interest saving, that return isn’t guaranteed.
Investments could perform strongly. They could also fall in value – sometimes substantially – particularly over shorter periods.
So the higher your mortgage rate, the more attractive overpaying may become.
But the interest rate isn’t the only number that matters.
Could investing produce a better return?
This is often where the debate begins.
If your mortgage costs 4% but you think your investments could return 6%, surely investing is the obvious choice?
Not necessarily.
An expected investment return is just that: expected.
Markets don’t deliver the same return every year, and you don’t know in advance what you’ll receive.
A portfolio might grow by considerably more than your mortgage rate in one period and fall in value in another.
You also need to consider investment charges, tax and, importantly, the level of risk required to pursue that potential return.
Comparing a guaranteed saving in mortgage interest with a potential investment return isn’t quite an apples-to-apples comparison.
How would you feel if your investments fell?
Imagine you have £20,000 available.
You could use it to reduce your mortgage, but instead you decide to invest it.
Six months later, markets fall and your £20,000 investment is temporarily worth £17,000.
Would you be comfortable leaving it invested?
Or would you regret not paying £20,000 off the mortgage?
There’s no correct emotional response to that scenario, but it tells you something important about your attitude to risk.
Investing generally works best when you have a sufficiently long timescale and can tolerate market fluctuations without feeling pressured to sell at the wrong time.
If you know that seeing the value fall would cause sleepless nights, the theoretically higher potential return may not be worth it to you.
Before doing either, check your emergency savings
There’s another option that can easily get forgotten in the mortgage-versus-investment debate:
keeping some money in cash.
Before making large mortgage overpayments or increasing investments, consider whether you have enough accessible savings for emergencies.
What would happen if you lost your job?
What if the boiler needed replacing, the car broke down or you suddenly faced a large unexpected bill?
Money used to overpay a mortgage may be difficult to access again, depending on the terms of your mortgage.
Investments can usually be sold, but if markets happen to be down when you need the money, you could be forced to sell at a loss.
That’s why an appropriate cash reserve can be an important foundation before deciding what to do with surplus money.
Don’t forget about tax-efficient investing
If you decide investing is appropriate, how you invest can make a significant difference.
For example, ISAs can allow investments to grow free from UK Income Tax and Capital Gains Tax, subject to the relevant rules and annual allowance.
Pensions can offer valuable tax advantages too, although pension money is normally locked away until you reach the minimum pension age that applies to you.
That difference matters.
If you’re investing for retirement in 20 years, a pension may form part of the discussion.
If you’re investing towards a goal in seven years, accessibility may be much more important.
The question isn’t simply:
“Should I invest?”
It should also be:
“What am I investing for, when might I need the money and which type of account is appropriate?”
How important is being mortgage-free to you?
Not every financial decision can be reduced to a spreadsheet.
For some people, being mortgage-free is an important personal goal.
They like knowing their home belongs to them outright. They want lower monthly expenditure before retirement, or they simply dislike carrying debt.
Someone else may be completely comfortable maintaining an affordable mortgage while investing more towards longer-term goals.
Neither approach is automatically right or wrong.
The important thing is understanding the trade-off you’re making.
Paying down the mortgage provides certainty and reduces debt.
Investing retains the possibility of greater long-term growth, but introduces investment risk.
Check the rules on mortgage overpayments
Before sending a large lump sum to your mortgage provider, check the terms of your mortgage.
Some lenders allow borrowers to overpay a certain amount each year without penalty, while charges may apply if you exceed the permitted amount during a fixed or discounted deal period.
It’s also worth understanding what happens after you make an overpayment.
Will it reduce your monthly payment, shorten your mortgage term, or can you choose between the two?
If your objective is to become mortgage-free sooner, shortening the term may be particularly relevant.
Don’t assume all mortgages work in exactly the same way – check the terms of yours first.
Think about when you’ll need the money
Timescale can change the decision significantly.
Suppose you’re 35, have a 25-year mortgage and are investing for retirement several decades away.
You potentially have a long investment horizon during which you can ride out periods of market volatility.
Now imagine you’re planning to retire in three years and want your mortgage cleared before you finish work.
The priorities may look very different.
This is why your short- and long-term goals need to be considered together.
You might want to:
- become mortgage-free before retirement
- build investments for financial independence
- help children with university or a first home
- move house
- retire earlier
- build an emergency fund
- create more flexibility in later life.
Your spare £500 or £1,000 each month can only be used once, so deciding which goal matters most is an important part of financial planning.
Could you do both?
Mortgage versus investments is often presented as an either/or decision.
It doesn’t have to be.
Suppose you have an additional £600 available each month.
You might decide to put £300 towards your mortgage and £300 towards investments.
Or perhaps you prioritise building your cash reserves first, then split the surplus between mortgage overpayments and investing.
A blended approach can provide some of the certainty of reducing debt while still allowing you to build assets for the future.
It may not produce the mathematically perfect outcome – something you can only know with hindsight anyway – but it could create a balance you’re comfortable with.
What about your pension?
Even though this isn’t primarily a pension question, your pension shouldn’t be ignored.
Imagine you’re aggressively overpaying your mortgage while contributing only the minimum to your workplace pension.
If additional pension contributions would attract further employer contributions, overlooking the pension could mean missing out on valuable benefits.
Similarly, depending on your circumstances, tax relief could make pension contributions attractive as part of your long-term retirement planning.
That’s why mortgage overpayments shouldn’t be considered in isolation.
You need to look at the mortgage alongside your pension, ISAs, savings, investments and other financial objectives.
Run the numbers – but also run the scenarios
Rather than trying to find a universal rule, it can be more useful to model different options.
For example:
Scenario one: Continue making the normal mortgage payment and invest all your surplus income.
Scenario two: Direct all surplus income towards the mortgage and become mortgage-free earlier.
Scenario three: Split your surplus between investments and mortgage overpayments.
You can then look at what each approach could mean over five, ten or twenty years.
Cashflow modelling can be particularly useful here because it allows you to bring the different https://lazenbysfs.co.uk/planning-your-financial-futureparts of your finances together.
What happens if investments perform below expectations?
What if mortgage rates rise when your current deal ends?
What if you retire earlier?
What if your income changes?
What if you need a large amount of money unexpectedly?
The purpose isn’t to predict the future perfectly.
It’s to understand whether your plan has enough flexibility to cope when the future doesn’t go exactly as expected.
The answer can change
Perhaps this is the most important point.
Choosing to invest today doesn’t mean you have to prioritise investing forever.
And deciding to overpay the mortgage doesn’t mean every spare pound must go towards the mortgage until it’s cleared.
Your circumstances will change.
Interest rates change. Investment markets change. Salaries change. Families change. Your goals change.
You might prioritise investing while mortgage rates are relatively low, then increase overpayments when you remortgage at a higher rate.
You might focus on the mortgage as retirement approaches because reducing your monthly expenditure becomes more important.
Or a pay rise might allow you to do more of both.
A good financial plan isn’t something you decide once and never revisit.
So, should you overpay your mortgage or invest?
There isn’t a universal answer.
For some people, reducing the mortgage will provide certainty, lower future expenditure and the peace of mind of becoming debt-free sooner.
For others, maintaining an affordable mortgage while investing surplus income towards long-term goals may be more appropriate.
And for many people, a combination of the two could make sense.
The important thing is not to make the decision based on one number alone.
At Lazenby’s Financial Services, we look at the whole financial picture – your mortgage, pensions, savings, investments, tax position, retirement plans and wider goals.
Because the real question isn’t simply:
“Would I be better off overpaying my mortgage or investing?”
It’s:
“How should I use the money I have available today to give me the best chance of achieving the future I want?”
That’s a much more useful question to answer.
This article is for general information only and does not constitute financial, investment, mortgage or tax advice. Investments can fall as well as rise and you may get back less than you invest. Tax treatment depends on individual circumstances and tax rules can change. Check your mortgage terms and any applicable early repayment charges before making overpayments.
