Here’s a question that keeps a lot of people up at night: what should you do with your spare cash?
Let’s say you’ve got £100 sitting in your account at the end of each month.
You could throw it at your mortgage and pay it off faster.
Or you could invest it and aim to grow it over time.
But which one actually makes sense for you?
The answer isn’t as straightforward as you might think. And it changes quite a bit depending on what’s happening with interest rates right now.
Remember this is not financial advice and capital is at risk when you invest. Always do your own research.
The Interest Rate Situation Right Now
The base rate has come a long way from the near-zero era.
Back in 2021 it was as low as 0.25%. Debt was cheap. People could afford bigger houses.
Those days are gone.
As things stand the base rate is 3.75%, so if you’ve remortgaged recently you’re probably paying a lot more than you did a few years ago.
That higher cost of debt changes the whole calculation about whether to overpay or invest.
Let's Run The Numbers
I’m going to keep this simple. Let’s say you have:
- £300,000 mortgage remaining
- 4% interest rate
- 25 years left to pay
- £100 extra per month to use
This is pretty realistic for a lot of people right now.
Option 1: Overpaying Your Mortgage
If you put that £100 towards overpaying your mortgage each month, here’s what happens:
You’d save £19,042 in interest.
Not bad at all.
You’d also shorten your mortgage term by 2 years and 5 months.
Instead of paying for 25 years, you’d be mortgage-free in 22 years and 7 months.
That’s a guaranteed return.
No risk.
No wondering if the stock market will crash next year.
Option 2: Investing The Money
Now let’s look at investing that same £100 per month.
We’ll use 8% average returns, which is pretty reasonable for a long-term investment in something like an index fund.
By the time those 25 years are up, your investment could be worth around £95,100.
You’d have put in £30,000 of your own money. The rest, around £65,100, would be growth.
What Do The Numbers Say
Overpaying your mortgage saves you £19,042 in interest.
Investing could gain you around £65,100 in growth.
That’s roughly £46,000 more than overpaying.
More than three times the benefit.
And remember, this assumes an average 8% return.
Some years will be better. Some will be worse.
But over the long term, that’s a realistic expectation based on historical data.
You can check your own numbers using our compound interest calculator and mortgage calculator.
Why The Numbers Work Out This Way
Your mortgage interest is 4%.
Your investment returns are 8%.
That 4% gap is doing a lot of heavy lifting here.
When your mortgage rate is relatively low and investment returns are relatively high, investing wins on paper.
The maths is pretty clear.
But numbers aren’t everything.
When Overpaying Might Make More Sense
There are times when overpaying your mortgage makes more sense, even if the numbers don’t add up on paper.
If your mortgage rate is above 6-7%, overpaying starts to look really attractive.
At that point, the guaranteed return from paying down debt starts to match what you might get from investing.
If you have a strong desire to be debt-free, that matters.
Some people just hate owing money. And that’s completely valid.
Don’t have much of an emergency fund?
It’s worth building that safety net before you start investing for growth.
Are you risk-averse? Investing can feel scary.
Markets go up and down.
If watching your investment drop 20% would keep you up at night, maybe the guaranteed return from overpaying is better for you.
Near retirement?
You probably want to reduce risk, not increase it.
Paying off your mortgage before you stop working can give you real peace of mind.
If you have more money to put towards it, you could potentially pay your mortgage off 7 years faster.
When Investing Might Make More Sense
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If your mortgage rate is below 5%, investing usually wins.
The gap between what you’re paying on your mortgage and what you could earn from investments is wide enough to make it worthwhile.
Got a long time horizon?
We’re talking 10+ years here.
The longer you invest, the more time you have to ride out the bad years and benefit from the good ones.
Already have an emergency fund? Brilliant.
You’ve got your safety net sorted. Now you can think about growth.
Comfortable with market volatility?
Some people can watch their investments swing up and down without losing sleep. If that’s you, investing makes sense.
Want to maximise your wealth?
Then investing could be the way to go. The numbers in this example lean that way.
What About Peace Of Mind?
Here’s where things get emotional.
We’re living through some of the biggest changes to living standards since World War II.
Taxes are at their highest ratio to wages since the 1970s. Everything is expensive.
You know that feeling when you go to pay for something and the cashier says the total?
That moment where you want to say “how much?” but you hold it in? Yeah, everyone’s feeling that right now.
There’s also a lot of chatter about job security. AI taking jobs. Big companies laying off tens of thousands of employees.
Having a big debt hanging over your head can feel quite worrying. And that’s completely understandable.
For many people, clearing that mortgage would be a huge weight off their shoulders.
If costs keep rising and you lose your job, having a smaller mortgage (or no mortgage at all) would feel pretty nice.
The feeling of owning your home outright is worth something.
Why Investing Gives You More Options
There’s one massive benefit to investing that gets overlooked: you can actually access your money.
Once you overpay your mortgage, getting that money back out is nearly impossible without remortgaging. And that’s expensive.
But if your money is in an investment account like a Stocks & Shares ISA, you can use it for:
Home improvements that add value to your property
A bigger nest egg in retirement
Buying a second home
Your child’s education
Emergency expenses – although you typically would not want to use investment money for this, you really should have a separate emergency fund!
Having access to money matters.
A lot.
What if you lose your job? What if you need money quickly?
Your investments can help you. Your overpaid mortgage can’t.
Although you do need to factor in that with investments being able to go up and down in value, there is a chance it could be worth less when you need to withdraw than what you put in.
That’s why building an emergency fund first is so important.
What About Doing Both?
If you’ve got £200 per month spare, you could split it.
Put £100 towards your mortgage and £100 into investments.
You get the guaranteed return from the overpayment.
And you get the potential for higher growth from investing.
Plus, you’re building your nest egg whilst lowering your debt.
That’s a solid strategy.
You feel like you’re making progress on both fronts.
Sometimes that psychological benefit is worth more than optimising every last pound.
What About Inflation?
Inflation and interest rates tend to move together, and the gap between them is what matters here.
With the base rate at 3.75% and inflation around 2.8%, rates are currently a little above inflation. That means money sitting in savings is just about holding its value rather than going backwards.
The rule of thumb: when rates sit comfortably above inflation, savings and investments tend to do the heavy lifting, so overpaying is less urgent. As rates fall back towards inflation, putting extra cash against your mortgage starts to look better.
It’s worth a quick check of where rates and inflation sit whenever you’re weighing this up.
Can You Actually Overpay?
This is important: not all lenders let you overpay.
And some have restrictions.
Some mortgages allow £10,000 per year in overpayments, which is pretty decent.
But it’s still capped.
If you inherited £50,000 tomorrow, you might not be able to throw it all at your mortgage without penalties.
Check your mortgage terms. You might have early repayment charges that make overpaying more expensive than you think.
This is especially true if you’re on a fixed-rate deal.
Breaking that deal early can cost you thousands.
Other Benefits Of Managing Your Mortgage Well
If you show your lender that you’re consistently overpaying, they might look at you more favourably when you remortgage.
You could get better rates.
Your loan-to-value ratio improves.
That means you move into better rate brackets. Even if you don’t overpay much, it helps.
And once you’ve paid off your mortgage, you have much more disposable income. You could then invest aggressively without worrying about debt.
Although by that time, you’re probably in your late 40s, 50s, or 60s. Your investment strategy might be more about protecting what you have rather than growing it aggressively.
Still, having no mortgage means more money in your pocket. That’s undeniable.
The Risk You Need To Understand
Investing doesn’t come with guarantees. You’ll have good years and bad years.
The 8% average return we used is based on historical data.
Past performance doesn’t guarantee future results. You’ve heard that warning a thousand times, but it’s true.
You could invest for five years and see your money barely grow. Or even shrink. That’s happened before and it will happen again.
But the longer you invest, the lower your risk.
You could still experience a bad few years, and when that happens, it can feel like a missed opportunity.
You need to weigh up whether you’re comfortable with that risk.
Can you handle watching your investments drop 20% in a bad year?
Your House Value Matters Too
Your house will probably increase in value over 25 years.
That’s another form of wealth building that happens whether you overpay or invest.
If your house is worth £300,000 now and grows at 3% per year, it’ll be worth about £627,000 in 25 years.
That wealth is there either way.
The question is just what you do with your extra £100 per month.
What Should You Actually Do?
Run the numbers yourself.
Use your own mortgage details. Work out what makes sense for your situation.
How much do you really want to be debt-free?
Is peace of mind worth more to you than potentially higher returns?
Do you have an emergency fund? If not, build that first before you do either option.
Are you comfortable with risk?
Be honest with yourself. Some people say they can handle volatility, but they panic and sell at the worst possible time.
What’s your mortgage rate? If it’s 6% or higher, overpaying looks much more attractive. If it’s 4% or lower, investing probably wins.
How long until you retire?
The closer you are, the more sense it makes to reduce debt rather than increase risk.
The bottom line is that the numbers favour investing by quite a bit.
But the numbers aren’t everything. Some people value peace of mind more than a mathematical advantage. The feeling of having no mortgage wins for some.
Personal finance is personal.
There’s no wrong answer here. There’s just the answer that’s right for you, based on your numbers, your goals, and your personality.
Maybe that’s overpaying. Maybe that’s investing. Maybe that’s doing a bit of both.
The important thing is that you’re asking the question. You’re thinking about what to do with your extra money. That puts you ahead of most people.
Whatever you choose, you’re making progress. And that’s what matters.
