It’s a question that has come up several times with clients recently and in truth, it’s one that has been asked in one form or another for as long as mortgages have existed.
If you’ve found yourself with some spare income each month, or perhaps you’ve received a bonus or inheritance, you may be wondering whether it’s better to use that money to reduce your mortgage or invest it for the future.
As with many financial planning questions, there isn’t a universal right or wrong answer. The best decision depends on your financial circumstances, your objectives, your attitude to risk and, perhaps most importantly, what will help you sleep better at night.
Looking at the Numbers
For many people, myself included, the first instinct is to approach the decision as a mathematical exercise. If the mortgage interest rate is 4% per annum, and the belief is that investments could achieve returns of 6% or 7% per annum over the long term, then investing the money appears to be the obvious choice. On paper, your money has the potential to work harder for you than the interest you’re saving by reducing your mortgage (although not guaranteed).
The calculation can become even more compelling if you’re able to make pension contributions instead. Not only does your money have the opportunity to benefit from long-term investment growth, but pension contributions can also attract tax relief. For many people, particularly higher-rate taxpayers, this can significantly increase the value of every pound invested. In some cases, matching employer pension contributions can make the decision even more attractive, effectively providing an immediate return before investment growth is even considered.
Viewed purely through a financial lens, investing rather than making mortgage overpayments will often come out ahead over the long term.
If financial planning was simply about maximising returns, the answer would often be straightforward. But fortunately, or unfortunately, money isn’t that simple because we’re not spreadsheets. We’re people and financial planning is rarely about finding the answer that looks best on a spreadsheet.
Cashflow Matters More Than Many People Think
A mortgage is usually the largest regular financial commitment most people will ever have. Making overpayments today may not simply reduce the amount of interest payable over the life of the loan, it could also shorten the mortgage term or reduce future monthly repayments, depending on how the lender applies the overpayments. That can have a meaningful impact on future cashflow.
Imagine approaching retirement with a mortgage that has already been repaid, or at least substantially reduced. The amount of income you need each month could be significantly lower, giving you greater flexibility. It might mean reducing your working hours earlier than planned or simply feeling more comfortable about making the transition into retirement.
Likewise, if life throws an unexpected challenge such as redundancy or illness, having a smaller mortgage balance may provide greater flexibility and resilience.
Cashflow is often one of the most overlooked aspects of financial planning, yet it is one of the things that has the biggest influence on your financial wellbeing.
And … The Emotional Side of Money
There is another factor that is impossible to capture in a financial calculation. How does carrying debt make you feel?
Some people are entirely comfortable with having a mortgage. They understand that it is a relatively low-cost form of borrowing and are happy knowing their investments are working for them elsewhere. Others feel a genuine sense of relief from reducing their debt.
Neither viewpoint is wrong.
Over the years, we’ve worked with many clients who describe paying off their mortgage as one of the most satisfying financial moments of their lives. The feeling of knowing that their home is completely theirs, regardless of what happens in the economy or financial markets, gives them enormous peace of mind.
That feeling has value. It doesn’t appear on an investment statement or a cashflow forecast, but it is every bit as real as investment returns. Financial planning isn’t simply about maximising wealth. It’s about helping you use your money in a way that improves your quality of life.
If becoming mortgage-free helps you feel more secure and less anxious about your finances, that benefit shouldn’t be dismissed simply because an investment projection suggests you might have ended up with more money elsewhere.
There Doesn’t Have to Be an Either/Or Decision
It’s easy to assume the decision has to be one or the other. In reality, many people find the best solution sits somewhere in the middle.
You might choose to increase your pension contributions to take advantage of valuable tax relief while also making modest mortgage overpayments each month. Alternatively, you may decide to focus on investing while interest rates remain relatively low, with a plan to increase mortgage overpayments later.
Financial planning is rarely about finding the perfect answer today. More often, it’s about finding the balance that supports both your current circumstances and your future goals.
So, What Should You Do?
If you’re hoping for a simple yes or no answer, I’m afraid there isn’t one. The decision shouldn’t be based solely on mortgage interest rates or expected investment returns. Instead, it’s worth asking yourself a few broader questions.
What are you trying to achieve with your money? How important is financial flexibility over the coming years? Would becoming mortgage-free improve your sense of security? Could investing through a pension provide significant tax advantages? And how does each option fit into your wider financial plan?
When viewed in isolation, overpaying a mortgage and investing can feel like competing choices.
When viewed as part of a comprehensive financial plan, they become two different tools that can help you achieve the same objective: financial security and the freedom to live the life you want.
My Final Thoughts
One of the biggest misconceptions in personal finance is that every decision has a single “best” answer. However, good financial planning is about making decisions that are technically sound while also being right for you.
For one person, investing the spare money may lead to greater long-term wealth. For another, paying off their mortgage earlier may provide the confidence and peace of mind that allows them to enjoy life more today. Neither approach is inherently better.
The right answer is the one that not only supports your financial future but also gives you confidence and peace of mind today. That’s why financial planning is about much more than the numbers. It’s about understanding what matters to you and using your money to help you get there.
*Investments carry risk.
**A pension cannot normally be accessed until age 55 (57 from 2028).
***Failure to make mortgage payments may result in your home being repossessed.
Production