Overpaying your mortgage vs investing

This is one of the most common questions I’ve gotten from friends. It’s also been a relevant subject in our household since we’ve bought our house almost 2 years ago and been thinking hard how to save money, especially with the interest rates this high.

We’re due a remortgage in a month’s time and had to strongly consider whether to overpay with the new interest rate of above 5%.

It can shave off years of the length of the mortgage and save thousands on interest. But when is best to overpay and when is best to invest when you have some spare cash?

Before considering overpayment on our mortgage we made sure:

🙅🏼‍♀️ we had no high interest debt including any credit card debt

🍯 our emergency fund was 90% there

🏦 our lender allowed overpayments penalty free (this is usually up to 10% of the mortgage on fixed rate deals)

Paying off the mortgage early can be an emotional decision for many as some may prefer more security and stability, but as we’re fairly young, we purely want to make our money go further.

If you’re on the same page, then my example below could be helpful in deciding which is best - overpaying or investing?

Let’s say we have £300k on our mortgage with the new rate of 5% with 25 years left. We could overpay by £250 a month.

Based on the overpayment calculator, we could save £55k in interest and pay off the mortgage 5 years and 4 months early - not bad at all! Who wouldn’t want to be mortgage free much earlier? 👀

What happens if instead we choose to invest the same amount of money monthly in the stock market? 📈

If we base the returns on the last 100 years in the stock market, it would give you roughly 9-10% before inflation. Since, in the scenario above, the mortgage would be paid off 5 years and 4 months early, I have reduced the length of investment to 19.66 years to have a more accurate comparison.

I used 9% to calculate the returns. The results are in and they’re pretty clear.

💸 Overpaying £250 monthly on mortgage - savings of £55k

💸 Investing £250 monthly in the stock market - £148k, a difference of £93k!

I know which one we would choose 🙂 

I truly hope that the interest rates will come down in a few years, so the difference would be even more stark. And if we used a more moderate rate of returns of 7%, we would still end up with significantly more money when investing (£119k).

However, the one thing this calculation doesn’t consider is how overpaying on your mortgage can lower your loan to value (LTV) ratio and any reduction in interest rate you may get as a result of this.

For more detail, see differences based on LTV in rates offered in the past here.

Lastly, we need to remember that the stock market returns are not certain - the investments can go up and down, but over a long term such as 20 years we have a good chance of making money.

Mathematically, investing vs paying off the mortgage wins in most situations 🏆

My weekly recommendation

I really enjoyed this episode from the Mr MoneyJar Show, who had Ken and Mary from The Humble Penny on. They touched a few different topics including overpaying their mortgage, teaching kids about money early, Financial Joy concept and how to prioritise it in your family life and marriage/relationship.

Until next time ✌️

Lina at Money Blues