Should I pay off my mortgage or invest?

It can be tricky deciding whether to pay off your mortgage or invest it so your money can grow.

We reveal the benefits and drawbacks that you should consider. 

Deciding where to put your money 

If you’ve inherited a lump sum, received a bonus or have some extra cash, figuring out how to use that money wisely is likely near the top of your to-do list. 

Paying off your mortgage early – either in one go or through monthly overpayments – is an appealing option, as is investing in hopes that your money will rise in value. 

But what do you need to think about first?

For example, you might want to consider: 

• Clearing any debts first like credit cards, loans and overdrafts, especially if it incurs high interest.
• Building an emergency fund that will cover three to six months of expenses.
• Creating a savings fund for your child’s education.
• Paying into a pension, which can be very useful if you’re self-employed. 

If you still have extra money after addressing the above, it’s worth considering what to do next.  

You should start by looking into the specifics of your mortgage. For example, will you be charged for early repayments? How much is this? 

Most lenders will allow you to overpay up to 10% of your mortgage balance yearly without any fees, but these will apply to any overpayments over this amount. 

You should look at the costs of investing, including admin fees and portfolio management charges. 

The pros and cons of paying off your mortgage

Choosing to pay off your mortgage can be a difficult decision as there are many pros and cons to consider. 

What are the advantages of paying off your mortgage?

• Your mortgage is likely your most significant expense. The sooner you pay it off, the sooner you can free up money for other priorities.
• Paying off your mortgage as quickly as possible will reduce your total loan cost by saving you a significant amount in interest.
• Overpaying your mortgage will lower your loan to value (LTV) more quickly, allowing you to get a better deal when remortgaging. 

What are the disadvantages of paying off your mortgage?

• If your mortgage isn’t your only debt, overpaying could prevent you from resolving higher-interest debts. 
• You’ll have to potentially pay expensive early repayment charges (ERCs). 

The pros and cons of investing your spare cash

Overpaying the mortgage isn’t for everyone – if you’re considering investing instead, there are many pros and cons. 

The advantages of investing your spare cash

• Investing in stocks, shares and bonds could protect your capital from inflation and increase the value of your investment over time.
• If you plan your investment strategy, it may not be as time-consuming as expected.
• If you want to make the most of your money, investing is a good way (over other savings options) to potentially boost your returns.
• A robust investment portfolio can help you have healthy finances in the future.  

The disadvantages of investing your spare cash 

• While your investments could rise in value, they could also fall, losing you money.
• Some investing apps and sites have admin fees, while investment management support from an experienced adviser can be costly.
• If you’re more focused on preserving your wealth in the short term than increasing it, investing may not be right for you as it should be part of a long-term strategy.
• It can take a long time for an investment to increase in value. So, ensure you’re not spending money you might need immediate access to. 

Is it better to pay off your mortgage or invest?

Committing to your mortgage or investing means forgoing (or doing less of) the other.  

This is why it’s essential to determine, based on your circumstances, whether investing would be more beneficial than paying off your mortgage or vice versa. 

Investing may make you more money than paying off debt, but the savings from interest on mortgage payments can be substantial.  

It’s worth considering the below questions before making a decision. 

How much impact will the money you have to spare make?

Do you have a lump sum that would fully pay off your mortgage, or could you overpay by a certain amount?

It’s a good idea to calculate how much you can save in interest payments and whether you’ll be affected by any ERCs.  

Where are you in your life journey, and where are your finances?

If you’re approaching retirement, for example, are you prepared?

Do you need to focus on paying off your mortgage before you stop working and your monthly income falls, or should you top up your pension?  

Is growing your wealth and making passive income of interest?

Do you want to increase your capital through investment, and what is your risk tolerance? It’s worth remembering your investments could rise and fall in value. 

What you decide depends on your financial goals and priorities, as well as what is financially sustainable.

A financial adviser can offer guidance if you’re struggling to reach your money goals, whether you’re hoping to invest, pay off your mortgage or plan your retirement.

Unbiased can connect you with an expert adviser today.