This is a question that comes up frequently: If you have some spare cash, should you use it to pay off your mortgage or invest it for future growth?
There isn’t a single right answer—it really depends on your personal situation. But understanding the trade-offs can help you make the best choice for you.
Prioritising High-Interest Debt
Before tackling your mortgage or investing strategy, it’s worth checking whether there’s any expensive debt lurking. Credit cards and payday loans often come with eye-watering interest rates—20% or more in some cases. Paying these off first is a clear win. The “return” from clearing this kind of debt is essentially guaranteed and typically far higher than anything you’d reasonably expect from the stock market.
Personal loans and car finance tend to be cheaper but still worth reviewing. Whether to pay these off or invest instead comes down to how comfortable you are taking on risk and what kind of investment return you’re aiming for.
Student loans are a bit different—they often work more like a graduate tax than a typical loan, and the rules depend on when you took them out and how much you earn. That’s a bigger topic for another blog #cliffhanger.
What About the Mortgage?
When it comes to deciding between paying off your mortgage early or investing your spare cash, the calculation seems simple at first glance: just compare the interest rate on your mortgage with the expected return on investments.
For example, if your mortgage interest rate is 4%, paying off £10,000 of your mortgage effectively gives you a guaranteed, tax-free 4% return by saving those future interest payments. If you expect your investments to return more than 4% after tax, then investing might seem a better option.
The Real-World Trade-Offs
However, this decision isn't quite as straightforward as comparing two numbers.
- Risk considerations: Investment returns aren't guaranteed. Markets fluctuate, and all investments carry some element of risk. By contrast, paying down your mortgage offers a risk-free return—you're definitely saving on interest, and that's locked in.
- Tax implications: The investment wrapper makes a significant difference. Pensions and Lifetime ISAs offer substantial tax benefits—including upfront tax relief or government bonuses—which can significantly boost your effective returns. However, if you're investing through a General Investment Account, you'll likely pay income tax on dividends and capital gains tax on growth, reducing your net returns.
- Emotional value: The peace of mind from watching your mortgage balance decrease can't be quantified. For many people, this sense of progress and increased financial security is just as valuable as potential investment gains.
- Access: Your investment accounts (ISAs, GIAs etc) are accessible and available to you should you ever need them. In contrast, mortgage paydowns lock away your money- to access it again you’ll need to pay fees and interest via an equity release/remortgage, or sell the house.
A Balanced Approach
We’ve seen clients prioritise mortgage repayment above everything else, and then regret missing the tax benefits and flexibility that investments offer. We’ve also seen clients hold too much cash while sitting on expensive mortgage debt.
In most cases, the answer lies in a three-way split:
- Mortgage overpayments – to reduce future costs and improve financial resilience
- Pension contributions – to maximise long-term, tax-efficient growth
- Accessible investments – ISAs or general investment accounts that offer flexibility
This approach balances the certainty of debt reduction, the tax efficiency of pensions, and the flexibility of accessible investments.
A pension is a long-term investment and funds are not normally accessible until 55 (rising to 57 from April 2028). When investing via a pension, your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Here are some additional considerations:
Risk Capacity: An Overlooked Benefit of Debt Reduction
There's another benefit to paying down debt that isn't immediately obvious: it can actually enhance your overall investment strategy.
Debt repayment is essentially a "risk-free" investment, equivalent to a risk level 1 in our risk profiling scale. By allocating a portion of your portfolio to this risk-free element, you can potentially take more risk with your other investments.
For example, if you have £100,000 to allocate and want a moderate risk profile overall:
- Option 1: Invest all £100,000 in a moderate-risk portfolio (risk level 5)
- Option 2: Use £50,000 for mortgage repayment (risk level 1) and invest £50,000 in a higher-risk portfolio (risk level 8-9)
Option 2 could generate better long-term returns while maintaining the same overall risk profile as Option 1.
A Built-In Safety Net
Mortgage overpayments can also act like a form of insurance against worst-case scenarios:
- Income shock: Lower monthly costs give you breathing space if your income falls.
- Market downturn: If markets crash, having a smaller mortgage means less pressure to sell investments at a loss.
- Emotional uncertainty: In an increasingly volatile world, the security of owning more of your home can be worth more than extra investment returns.
Conclusion
There’s no one-size-fits-all answer—your ideal approach depends on your personal goals, circumstances, and attitude to risk.
- If peace of mind is your priority, mortgage overpayments can offer the certainty and security you’re looking for.
- If long-term wealth creation is your focus, pension contributions are hard to beat thanks to the generous tax relief and growth potential.
- If flexibility matters most, ISAs and other accessible investments give you options without locking your money away.
The key takeaway? It doesn’t have to be all or nothing. Like most areas of financial planning, the best outcomes often come from striking the right balance—and revisiting it regularly.
Your financial strategy should evolve alongside changes in interest rates, tax rules, and your own circumstances. A regular review helps ensure your plan stays aligned with what really matters to you.
Happy Thursday!
Please note that the Financial Conduct Authority does not regulate tax advice. Levels, bases, and reliefs from taxation may be subject to change, and their value depends on the individual circumstances of the investor. When investing, your capital is at risk. The value of your investment (and any income from it) can go down as well as up, and you may get back less than you invested, particularly where investing for a short timeframe (we usually recommend a horizon of at least 5 years). Neither simulated nor actual past performance is a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Kind regards,
George
