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. 

How to decide 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 useful, especially if you’re self-employed.

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

If you have spare cash, then overpaying your mortgage might seem like a no-brainer. There’s a huge peace of mind that comes with entering later life and retirement mortgage-free.

However, focusing solely on clearing debt could mean you miss out on potential wealth-building opportunities. Historically, investments have beaten both cash and inflation, and values tend to snowball over time, providing a valuable nest egg for retirement.

Doing a bit of both could offer the best of both worlds - overpaying your mortgage and also boosting and gradually building your investment wealth.

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?

Below are some of the main benefits of paying off your mortgage early.

• You'll pay off your mortgage sooner, freeing 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.

• Clearing your mortgage could give you peace of mind.

What are the disadvantages of paying off your mortgage?

Below are some of the potential cons of paying off your mortgage early.

• Your higher initial mortgage payments mean you’ll have less money to save or invest elsewhere.

• You also need to watch out for early repayment charges.

• You may miss out on higher interest or investment growth elsewhere. Eg. you could save at a higher rate and clear your mortgage later.

• Making overpayments could make it harder to build wealth elsewhere - eg. in a pension or cash savings.

The pros and cons of investing your spare cash

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

The advantages of investing your spare cash

Below are some of the main benefits of investing your money vs paying off your mortgage.

• Investing in stocks, shares and bonds could protect your capital from inflation and increase the value of your investment over time.

• Investment returns tend to beat cash and interest rates over time.

• Building investment wealth over time allows you to protect your wealth from tax inside ISAs and pensions.

The disadvantages of investing your spare cash 

Below are some of the potential cons of investing your money vs paying off your mortgage.

• Investment returns aren’t guaranteed.

• Returns aren’t guaranteed and investing is more risky than making mortgage overpayments.

• You’ll need to watch out as fees can eat into your investment returns. 

Is it better to pay off your mortgage or invest?

In reality, the best decision for you will depend on your circumstances.

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

It’s worth considering the following 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?  

Do you want to grow your wealth?

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

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

Should you overpay your mortgage or pay more into your pension?

This is a different question to investing your spare cash generally, as pensions come with their own tax advantages that can tip the balance.

There are several benefits to paying more into your pension:

• You receive tax relief on contributions: at least 20% for basic rate taxpayers, rising to 40% or 45% for higher and additional rate taxpayers.

• If you're in a workplace pension, your employer is likely to contribute too, adding money on top of your own contributions.

• Your contributions are invested on your behalf, giving them the potential to grow over the long term.

• Pension savings currently sit outside your estate for inheritance tax purposes (however new changes are set to come into place from April 2027).

• Growth within your pension isn't subject to income tax or capital gains tax while it remains invested.

This tax relief means £100 paid into your pension could cost a higher rate taxpayer as little as £60 once relief is claimed back. No equivalent boost exists when overpaying your mortgage – every pound you put towards your mortgage is a pound from your take-home pay.

The trade-off is access. Pension money is locked away until age 55 (rising to 57 from 2028), and only 25% can be withdrawn tax-free, up to a cap of £268,275. The rest is taxed as income when you draw it.

A mortgage overpayment, by contrast, reduces your debt immediately and permanently, with no future tax to consider.

Whether overpaying or contributing to a pension works out better in pure financial terms largely comes down to your mortgage rate versus your expected investment growth.

If your mortgage rate is higher than the return you'd reasonably expect on your pension investments, overpaying tends to save you more.

If investment growth is likely to outpace your mortgage rate, particularly once tax relief is factored in, your pension contributions are likely to go further over the long term.

If you're unsure which makes more sense for your circumstances, a financial adviser can help you weigh up the numbers.

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