Mortgage & Investing
Does overpaying beat investing in the stock market?
Sometimes. Overpaying gives you a certain saving on your mortgage interest. Investing gives you the possibility of a higher return, but the result cannot be known in advance.
Quick answer
Neither choice always beats the other. Wayli compares where the same spare money could leave you at the end of the same period, while keeping mortgage-interest savings separate from assumed investment returns.
What does ‘beat’ mean?
To compare the two choices fairly, you need to look at where your spare money leaves you at the end of the same period.
Overpaying may beat investing if the financial benefit of reducing your mortgage is greater than the value produced by investing.
Investing may beat overpaying if the investment grows by more than the value created by paying the mortgage off sooner.
The comparison is not simply between your mortgage rate and an assumed investment return. It also needs to account for how the mortgage balance falls, how much interest is avoided and what happens after the mortgage is repaid.
What happens when you overpay?
An overpayment is an extra payment made on top of your normal mortgage payment.
It reduces the capital you still owe. Future interest is then calculated on the reduced mortgage balance.
This can mean:
- less mortgage interest is charged
- more of later payments goes towards clearing the capital
- the mortgage is repaid sooner
- your normal mortgage payment becomes available earlier
The interest saving is based on the mortgage rate being charged. It does not depend on stock-market performance.
What happens when you invest?
Instead of reducing the mortgage, you invest the spare money.
Your mortgage continues on its existing repayment path, so you do not receive the interest saving created by an overpayment.
The investment may grow through returns earned over time. It may also fall in value, particularly over shorter periods.
An assumed return helps illustrate a possible outcome. It is not a promise of what the stock market will deliver.
A worked example
Suppose you have a £180,000 mortgage, a 4% mortgage rate, 25 years remaining, a £950 monthly mortgage payment and £200 of spare money each month.
Using the £200 to overpay could save £30,159 in mortgage interest, repay the mortgage 79 months earlier and clear the mortgage about 6.6 years sooner.
Once the mortgage is cleared, the example assumes the released mortgage payment is invested for the rest of the original term. This gives the overpayment path a combined modelled value of £145,147.
If the £200 is invested instead and grows at an assumed 7% a year, it could be worth £162,014 after 25 years.
Under these assumptions, investing finishes £16,867 ahead.
Does that mean investing wins?
It wins in this example.
It does not prove that investing will always win.
A lower investment return, a higher mortgage rate or a different mortgage term could change the result. Overpaying offers a known reduction in debt. Investing offers a possible higher return in exchange for uncertainty.
Compare your own numbers
Use the Mortgage Decision Engine to compare the certain mortgage saving with the possible investment outcome using your own figures.
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Educational comparison only. Returns are not guaranteed. This is not personalised financial advice; check your mortgage terms and early repayment charges.