Should I overpay my mortgage or invest? The conundrum.

June 29, 2015

In a country where home-ownership is as big a deal as it is in the UK, it’s inevitable that, for a beginner investor, the question of whether or not to pay off your mortgage or invest will crop up. Not wishing to duck the big issues here on the blog, we thought we’d give you a few little titbits of information to get you started. Before we do, would you mind passing us that tin opener? We’re going to need it so that we can open this can of worms…

This might seem like a topic that should have an easy answer, but with so many factors at stake, the answer is, in fact, far from easy. You see, there are so many variables, such as the time you have left on your mortgage, the rate you’re currently paying, what you choose to invest in and how those investments perform, that no individual could possibly be in the same boat as another. Even whether your mortgage company calculates your interest on a daily, weekly, or quarterly basis will make a difference. Put those points together and already we’ve been sent down a path with a myriad of options, and we haven’t even begun to talk about whether or not you have dependents! See? We told you it was a can of worms.

Anyway, rather than answer the impossible, here’s a few points to consider if you decide to take on the challenge of working out whether or not either of these paths could be right for you.

It’s probably not worth considering if you have expensive debt

Working out whether or not to overpay on your mortgage or invest is a moot point if you have other forms of high-interest consumer debt. With mortgages and investments, we’re talking about 2-8% as a rough guide. With things like store cards or personal loans, we could be talking anything from 8-30%. So, maxed out on the credit cards? Got a car loan that’s at a crazy percentage? Deal with those first as it will likely be costing you more than any gains you’d make from investing or reducing your mortgage. There’s no point trying to invest for a not-guaranteed 8% if you have a credit card debt at 20%.

Investments will work for you…

We’ve talked a lot over the past few months about compound interest. We talk about it a lot because Einstein called it ’the eighth wonder of the world’ – it’s that important. The short version of the compound interest story is that you earn interest on your interest, meaning that over time you start to accumulate wealth much quicker. And the quicker you start, the quicker that cash ball starts rolling, and the bigger it ends up getting.

At some stage, your investments will start working for you. You may even reach the stage, if you invest early enough, where your investments can work harder than you can!

But paying off your mortgage could too

So, while investments can clearly work for you, can paying off your mortgage? Well, yes and no.

Yes, because working out the savings you’ll make by overpaying your mortgage isn’t as simple as reducing your balance by the lump sum that you put in – it has a much bigger impact. Overpaying your mortgage cuts the interest you’ll pay in the future, which would hopefully mean you’re mortgage-free much earlier, with less interest paid overall, and less debt. Big win! And mortgage-free means you now own that asset (your house) outright.

So, while your money isn’t necessarily working for you, you do now have a substantial asset, and without that fixed expenditure you have the option of investing that extra disposable income, which would make it work for you while you have the security of owning your own home.

But what if you’ve taken advantage of some of the unprecedented low mortgage rates of recent history, with a debt at less than 2%, and achieved an average investment return of 10%? You would have been far better off invested!

Although, when you pay off a bit more of your mortgage, that’s a pound that you don’t owe anymore. When you invest that pound, you’ve got no idea whether it’s going to up in value or shrink.

Does your head hurt yet? We’re not surprised.

Just the tax, ma’am

The last point to bring up is your tax situation. While it may not feel like it, paying off a mortgage is the equivalent of saving. If you have a 6% interest rate on your mortgage and you pay off £10,000 with a cash lump sum, that’s the equivalent of earning 6% on that £10,000 if it were in a savings account. Seen any 6% savings accounts around lately? Neither have we.

And the 6% you’ve just ‘earned’ from reducing your mortgage is potentially even better than earning 6% in savings, because outside of an ISA or a pension, you’ll be taxed on some of that 6%, reducing your returns (although keep an eye on the July budget to see if there’s any update on the ‘tax-free £1,000’ you can earn in any savings account).

Higher-rate tax payer? Paying into a pension? Your money could potentially work much harder in a pension than it could paying off your mortgage, as the Government adds so much to each contribution that you make. It could well be worth your while to invest for the long term rather than paying it off.

As clear as mud…

Well, we did warn you. As with any investment you’re going to make, this is a decision that requires a lot of thought. Maybe even more than most, due to the variables involved. There’s no right answer, because every single person will be in a different situation. Still, it makes for wonderful dinner conversation!


This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

The value of investments can fall as well as rise. You may not get back what you invest.

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