Should you overpay your mortgage or invest?

Most homeowners dream of the day they stop paying their mortgage. Getting that annoying monthly bill out of the way means more financial freedom. 

You can bring that day closer by making overpayments, either as lump sums or regular monthly top ups. Depending how committed you are, it can cut years off your mortgage term. But is it a smart use of your money? Or would you be better off saving or investing that extra cash instead? We’ll take a look at the pros and cons here.

Unless you'd rather spend it, your options are to pay down debts, save, or invest.

Debts

First, it’s almost always best to pay off expensive, high-interest debts like credit cards, overdrafts, and payday loans. Read on to learn how making additional payments on cheaper debts like a mortgage can benefit you in the long run.

Saving

It's always helpful to save some cash for rainy days (or sunny ones!), and interest rates have been steadily rising, so now's a prime time to set up a savings account. Besides being a safe option (with up to £85,000 guaranteed by the Financial Services Compensation Scheme), these accounts let you choose how you want to withdraw your cash. For example, some options let you access it instantly or with one month’s notice, while others involve locking it away for a year or more.

Investing

Your spare cash has more growth potential if you invest it rather than save it. However, the value of your investment could go down as well as up, and you may get back less than you put in. We've got more investing info below.

Mortgage overpayments are additional amounts you can pay to your lender, along with your usual repayments, to lower your balance.

You might decide to make overpayments to:

• Repay the loan more quickly. A lower balance means fewer repayments before the home is paid off. You might want to consider this if your mortgage is close to having a zero balance.
• Repay less in total. Interest is charged on the remaining balance of your mortgage, so by reducing the balance, you can reduce the amount of interest you pay (and so how much you pay overall).
• Try to get a better mortgage rate. When you pay off more of your mortgage, you'll lower your loan-to-value (LTV)the percentage of your home's value covered by your mortgage. For example, if your property's worth £500,000 and your mortgage balance is £50,000, your LTV will be 10%. A lower LTV could secure you a lower interest rate when you remortgage, although it will also depend on the overall market at the time. 

Your lender might only allow overpayments up to a certain percentage of the remaining balance – for example, 10% – or even charge a fee for overpayments. You’ll need to check these conditions before making an overpayment as, if there are high fees and penalties, this may not be the best use of your money.

Financial markets have ups and downs, meaning you might get back less than you invest. However, investing might also bring greater returns than either a fixed-rate interest account or the money you’d save from overpaying a mortgage. So, if you have a specific goal, such as paying for your children’s education or a family wedding, investing could take you closer to it. Although this is not a guarantee as the value of an investment can go down as well as up.

Despite the potential gains, it’s important to consider the possibility of losing any money you invest. Different types of investments react to market changes in different ways, so it can be a good idea to spread your money across different asset classes (such as shares, bonds and property) or invest in funds that do this for you. Some investments carry a much higher risk than others, so you should make sure you choose a level of risk you're comfortable with.

You shouId also plan to leave your money invested for at least five years. This can help if there are any temporary dips in the market, but there are no guarantees that will be long enough for you to make a profit.

Something else to consider is making your investments tax-efficient. You can invest up to £20,000 every year by using a stocks and shares ISA and you'll pay no UK income tax or capital gains tax on any returns you make from it. If you're prepared to wait until you are at least 55 to access your money (57 from 6 April 2028), the most tax-efficient way to invest could be through a pension, because you'll receive tax relief on top of your contributions within limits set by the government. So for every £80 you pay into a personal pension from your own money, the government adds £20. Tax rules may change and depend on your individual circumstances. You can learn more about pension-related benefits such as tax relief.

Overpaying your mortgage, saving, and investing can all be sensible uses of extra cash. But what’s best for you depends on your openness to risk, your need to access the money and your mortgage balance.

If you’re comfortable with risk, investing has greater potential returns. However, predicting the market is challenging, which is why most people leave it to the pros. Your returns depend on the products you invest in, the risk level you choose, the performance of the specific assets you hold and any charges you need to pay. If you’re considering investing, find out more about our savings and investment products.

Overpaying your mortgage and opening a savings account are two ways to avoid losing money. By comparing the interest rates you're offered on savings accounts with the rate of interest you're paying on your mortgage, you can work out whether you'll be better off paying into an account or lowering your outstanding mortgage balance.

Everybody’s situation is unique, and a financial adviser can help you figure out the best course of action. Remember you might be charged for any financial advice you receive. Find out more about financial guidance and advice.