Should I Pay Off My Mortgage Early or Invest?
Author: Pete Mugleston
CeMAP Mortgage Advisor, MD
If you find yourself in a fortunate position where you can pay off your mortgage early, you may wonder whether this is the most sensible use of your money. Perhaps it could be put to better use elsewhere?
After all, investing can be a tempting prospect – think about those who gambled on Google, Facebook or Apple back in the day. Or perhaps you know someone who’s reaped a hefty return on a SIPP?
Every investment comes with an element of risk, and repaying a mortgage early has its downsides.
But before you decide, look at our overpayments calculator below to see how this could work out for you. By inputting details such as your outstanding mortgage balance, remaining term, interest rate, and the amount you’re considering overpaying, you can instantly see potential savings on interest and how much quicker you could be mortgage-free.
This allows you to weigh the benefits of overpaying your mortgage against other financial opportunities, such as investing.
Mortgage Overpayments Calculator
This calculator can show you how much you could save and what your new mortgage payments will look like if you were to make overpayments as a lump sum, monthly amount or both.
Your current monthly repayment is:
What your mortgage repayments will look like based on your overpayments:
Potential mortgage term reduction:
Amount of interest you could save:
Now that you have a rough idea of how overpayments will affect your mortgage deal, make an enquiry to speak to a broker for bespoke advice about whether this is the right option for you.
Now you’ve got a rough idea of how making an overpayment can reduce the time left on your mortgage, it’s time to ask yourself a few questions:
Am I paying into a pension scheme?
If you don’t already have a pension (or if you do have one but are only making minimum contributions), if you have money to spare, it could be better off in a pension scheme rather than paying off your mortgage early.
Pensions are a tax-efficient way to save money because the government tops up your contributions with tax relief. If you’re part of a company pension, your employer will also contribute to your pot.
What are the tax implications of overpaying your mortgage versus investing?
When you invest, the returns you earn are subject to various taxes depending on the type of investment and how long you hold it.
Investments such as stocks, bonds, or funds may lead to capital gains tax on any profits made, depending on your income level and how long you’ve held the investment. Dividends from investments are also subject to tax, potentially increasing your annual tax liability.
Conversely, paying off your mortgage early primarily affects your finances by reducing interest payments, which do not have tax benefits since mortgage interest tax relief for residential mortgages has been phased out.
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Do you have any other more expensive debts outstanding?
If you have other, more expensive debts, it’s usually wise to pay them off before you consider paying off your mortgage early.
Credit cards, store cards, car loans, and other types of unsecured borrowing often charge interest rates significantly higher than those of your mortgage, meaning it could work in your favour to pay these off first if you have the cash.
Can you get a savings rate higher than your mortgage interest?
It may be possible to find a savings account that pays a higher interest rate than what you’re being charged on your mortgage – meaning you could potentially make more money than you’d save by overpaying.
Look into the options available to you and calculate the rate after paying tax on your funds.
Will you be charged for repaying your mortgage early?
If you repay your mortgage early or make an overpayment that’s more than your agreed monthly limit, an Early Repayment Charge (ERC) may apply.
An ERC is most likely to be included as a term of mortgage contracts where the customer has selected a product with a fixed, capped, or discounted interest rate.
Although many lenders allow you to overpay up to 10% a year without penalties, ERCs can potentially add up to thousands of pounds, depending on how much you overpay. Consider how much it’s going to cost you before proceeding.
Your mortgage terms may stipulate that you pay an early exit fee in addition to an ERC to compensate for the lender’s loss of interest.
What are the advantages of repaying my mortgage early?
Overpaying each month means lower payments in the future OR
Overpaying each month means a reduced mortgage term.
Security and peace of mind.
Potential to release equity if required.
Paying off in full means it frees up your cash flow each month.
What are the disadvantages of repaying my mortgage early?
Funds could be used to repay more expensive debts.
Using savings or cash reserves to overpay can be risky if emergency funds are needed.
Early repayment charges may apply.
Funds could reap a higher return elsewhere.
What are the advantages of investing?
Long-term growth potential.
The ability to earn returns according to your level of investment risk.
The stock market historically outperforms cash and inflation in the long term.
A new business venture/hobby to explore.
What are the disadvantages of investing?
There are no guarantees.
Potentially very risky for inexperienced investors.
It’s a long game – not suitable if you’re after a quick return.
Lack of security and peace of mind.
What’s the right option for me?
So, what’s best for you: early mortgage repayment or investment? Ultimately, it comes down to your situation, the level of risk you are willing to take, and how much you value your security.
If you’re undecided, you may be able to reap the benefits of both. If you have enough disposable income, you could explore putting half towards mortgage overpayments and the rest into the stock market.
If you need further advice on the best decision for your circumstances, please make an enquiry or call us on 0330 818 7026.
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Pete Mugleston
CeMAP Mortgage Advisor, MD
Pete, a CeMAP-qualified mortgage advisor and an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete successfully went the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained and his love of helping people reach their goals led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!
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