Now this is a question I get asked all the time! Should I overpay my mortgage or invest? And the answer isn’t black and white but we can run the numbers to help you decide.
Let’s compare two people with the exact same mortgage. In this scenario, both people have £200 extra each month and are deciding whether they use that money to overpay their mortgage or invest it instead.
For both people we are assuming:
- Mortgage: £250,000
- Term: 30 years
- Rate: 4%
Person A – Overpays their Mortgage
Person A sends their extra £200/month directly to their mortgage.
Their mortgage is gone in 23 years, saving them £45k in interest.
They then invest £1390/month for the remaining 7 years of their original mortgage term. This is the normal mortgage payment plus the £200 extra per month.
Assuming a 7% return over 7 years they will end up with £150k in their investment portfolio.
Summary:
- Mortgage free after 23 years
- £150k investment portfolio
Person B – Invests the £200/month
Person B chooses to invest the extra £200/month instead.
Assuming a 7% return they will end up with an investment portfolio worth £245k after 30 years plus their mortgage will be cleared as the term has ended.
Summary:
- Mortgage free after 30 years
- £245k investment portfolio
So according to the maths, Person B ends up financially better off than Person A after 30 years. But like I said in the intro, it’s not always that simple. Your personal goals will and should affect your decision to pay off your mortgage early or invest. And there are more options than just one or the other. Let me introduce you to Persons C & D.
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Person C – Half & Half
Person C takes a half & half approach and sends £100 to their mortgage and invests the other £100.
The extra £100/month mortgage overpayments reduces their mortgage from 30 years to 26 years. Paying it off 4 years early and saving them £28k in interest.
Plus the £100 invested at an assumed 7% return means after the 26 years they have a £88k investment portfolio. If they then invest the full £1390/month for the remaining 4 years they would have a portfolio worth £195k.
Summary:
- Mortgage free in 26 years
- £195k investment portfolio
Person D – Lump Sum Overpayment from Investments
Person D takes a different approach in which they invest the spare £200/month until the 23 year mark and then make a lump sum payment to clear the rest of their mortgage.
The £200/month investment at a 7% assumed return will grow to £137k over 23 years. The remaining balance on their £250k mortgage is £87k at this point. They make a lump sum payment to clear the balance leaving them with £50k in the investment portfolio.
They could then continue to invest £1390/month for the remaining 7 years and end up with £235k in their portfolio.
Summary:
- Mortgage free in 23 years
- £235k investment portfolio
Hopefully you can now see just how many different options there are for your finances and it is not a one size fits all. Although as you can see from these scenarios, investing might mean you end up with more money this doesn’t take into account any other factors or personal circumstances.
Things the maths doesn’t consider
1) Changing mortgage interest rates
Interest rates can fluxuate massively. Right now they are higher than they have been historically so 4% might be the rate you have now but 10 years into your mortgage this could be much lower. Alternatively, your interest rate could be even higher and paying it off quicker might be in your best interest.
For comparison, let’s look at mortgage we used in our maths with different interest rates. Here’s a reminder of the numbers:
- Mortgage = £250k
- Term = 30 years
- Repayment at 4% = £1194
And these would be your monthly repayments at various interest rates:
- Repayment at 5% = £1342
- Repayment at 3% = £1054
- Repayment at 2% = £924
See, there are hundreds of pounds worth of differences in your monthly repayment based solely on the interest rate of your mortgage.
2) Investments doing worse than 7% annually
Remember with investing your capital is at risk and you might not get back the same amount you invested. Typically experts use 7% as a rough estimate based on the historic growth of the stock market. But this isn’t a guaranteed 7%.
Let’s run the numbers on our people’s investment portfolios after 30 years if this was only 1% worse at a 6% annual growth rate.
- Person A = £148k (£2k less)
- Person B = £201k (£44k less)
- Person C = £172k (£23k less)
- Person D = £198k (£37k less)
But we should also acknowledge that your potential investments could do better than 7% annually. And this would impact the maths too.
3) The financial stability of being mortgage free
For most being mortgage free is more than just numbers on a paper. It means financial security and opens up lots more doors. Without your mortgage repayment, you can free up a lot of money in your budget for other things. Alternatively, it also means you don’t need to earn as much meaning you could reduce your working hours, go part-time, take a sabbatical… you get the picture.
It can also reduce a big mental burden. Not having a mortgage hanging over your head is often more important to someone than potentially having a few more pounds in an investment account.
That all goes to say that overpaying your mortgage vs investing isn’t an easy question to answer. It 100% depends on your personal situation and other goals you want to achieve in life. Have you been thinking about this question? What have you decided to do?
