Pay Off Mortgage or Invest? The Smarter Move, Explained with Maths
If you had an extra £500 or $500 a month, would you throw it at your mortgage to be debt-free sooner? 🤔
Or would you invest it in the stock market and let compound interest do its magic?
This is one of the most debated personal finance dilemmas, and the answer isn’t as simple as you might think.
Both options have strong arguments, but some unusual and compelling reasons go beyond just crunching numbers.
Let’s dive into the financial and emotional aspects of both choices, with practical examples, research-backed insights, and strategies to help you decide.
For context, in our 30s, we chose to pay off our mortgage in 7 years rather than 25 years, and we did it whilst also investing in the stock market.
We have zero regrets and see it as one of our best financial decisions 😀.
Today, a bigger portion of our income, aside from being spent on enjoyment, goes towards investing in the stock market to further boost our freedom pot.
👉🏽Read our Instant Sunday Times Bestseller, Financial Joy.
Why Paying Off Your Mortgage Early Can Be a Game-Changer
1. Guaranteed Returns
When you pay down your mortgage, you effectively earn a “return” equal to your mortgage interest rate.
For example, if your interest rate is 5%, every extra pound or dollar you pay saves you 5% annually in interest.
That’s a guaranteed return—something the stock market can never promise.
Take a £200,000 mortgage at 5% interest over 25 years.
Paying an extra £500 a month could save you over £73,000 in interest and cut your mortgage term by 11.1 years.
Imagine the peace of mind knowing you’re debt-free years ahead of schedule!
2. The Emotional Power of Debt Freedom
Psychologically, owning your home outright is freeing.
A 2018 study from Harvard Business School found that people experience higher levels of happiness when they reduce debt compared to when they accumulate wealth.
Debt can be stressful—even if it’s “good debt” like a mortgage.
Eliminating it gives you financial security and flexibility.
3. Recession-Proof Your Finances
Mortgage-free living means one less major bill to worry about if times get tough.
Whether it’s a job loss, a recession, or an unexpected expense, having a paid-off home can significantly reduce financial stress.
4. Simplify Your Retirement
If you aim to retire early or live off a smaller income in retirement, not having a mortgage payment simplifies your budgeting.
Without this monthly expense, your income requirements drop dramatically, making financial independence or optional early retirement more achievable.
This was one of the biggest appeals for us, especially having seen our parents retire and they still had the mortgage to pay.
Why Investing in the Stock Market Could Be the Better Bet
Here are some reasons why investing in the stock market might be a better option mathematically.
1. Stock Market vs Mortgage Pay Off In Numbers
The stock market has historically delivered average annual returns of around 7-10% after inflation.
Over the long term, this beats the typical UK or US mortgage interest rate, although interest rates remain fairly high, with the UK base rate currently 4.75%.
Let’s use an example:
Mortgage Details:
- Loan Amount: £200,000
- Interest Rate: 5% (fixed)
- Standard Term: 25 years
- Monthly Payment (without overpayment): £1,169.18
- Total Interest Over Term: ~£150,753
Mortgage Overpayment Scenario:
- By overpaying £500/month, the monthly payment becomes £1,669.18.
- The mortgage is paid off in 13 years and 11 months (167 months) instead of 25 years, wiping off 11 years and 1 month off the term.
- Total Interest Paid: ~£77,641
- Interest Saved: £150,753 − £77,641 = £73,112
Investment Scenario (Same Term: 13 years and 11 months)
- Investing £500/month in an index fund with an 8% annual return (compounded monthly) for 13 years and 11 months (167 months):
- Using the compound interest formula, the investment grows to approximately £153,511 (including the total invested of £83,500).
Comparison Over 13 Years and 11 Months
- Mortgage Overpayment Savings:
- Total Interest Saved: £73,112
- The mortgage is fully paid off, offering peace of mind and closer to financial freedom but with inaccessible capital.
- Stock Market Investment Growth:
- Total Value: £153,511 (including the total invested of £83,500).
- Potentially higher returns though with market volatility risks and capital is accessible.
Key Insights
- With a 5% mortgage rate, the difference between the two options narrows, but the stock market investment still generates more wealth (£153,511 vs. £73,112 in interest savings)
In this scenario, the stock market is expected to generate over double the amount saved in interest on a mortgage.
- This is still the case even after accounting for taxes and inflation.
- However, remember that the stock market return is not guaranteed, whereas, the mortgage return is 100% guaranteed.
- Plus, future stock market returns may not be as generous as they've been for the last 15 to 20 years.
- You also have to consider whether your stock market investments are made inside or outside an ISA for tax purposes.
2. Diversify Your Wealth
Your home is an asset, but it’s not liquid.
By investing in the stock market, you’re diversifying your portfolio and building a safety net you can tap into when needed.
This approach reduces the risk of being “house rich but cash poor.”
3. Keep Up with Inflation
Mortgage payments remain relatively fixed (excluding variable rates), but investments can grow to outpace inflation.
This means the purchasing power of your wealth increases over time.
4. Leverage Low-Interest Debt
If your mortgage rate is low (e.g., 2-3%), it might make sense to keep the debt and invest your extra money at a higher return.
This is known as “good debt leverage” and is a strategy used by many wealthy individuals.
Unusual and Compelling Reasons for Each Option
Reasons to Pay Off Your Mortgage Early
1. Freedom to Pursue Unconventional Dreams
Being mortgage-free can open doors to life changes like taking a career break, starting a business, or working fewer hours.
It’s a lifestyle choice as much as a financial one.
This is one of the biggest reasons why we chose to pay off our mortgage.
I wanted to leave my super stressful career as a CFO and explore something more creative and suited to my lifestyle as a dad.
In addition, the 9 to 5 grind was literally destroying my overall quality of life, marriage and well-being.
Without paying off the mortgage (backed by other investments), I won't have easily taken the leap to run The Humble Penny full-time.
2. Sleep Factor
There’s a psychological comfort in knowing you truly own your home.
No market crash or job loss can take it away from you.
This peace of mind or mental freedom can be worth more than financial returns.
3. Legacy Building
Paying off your mortgage can free up your estate for future generations.
A paid-off home provides a tangible, stable asset to pass down to your children or loved ones.
Reasons to Invest in the Stock Market
1. Hedge Against Rising Rates
If inflation rises, your mortgage interest rate could increase (if it’s variable).
By investing, you build a buffer that grows with inflation, protecting your future purchasing power.
2. Flexibility for Opportunities
Investments can be sold or used as collateral for other ventures, like buying a rental property or funding a child’s education.
This flexibility doesn’t exist with home equity unless you refinance.
3. Opportunity Cost of Time
The earlier you start investing, the more time you have to take advantage of compound growth.
Delaying investments to focus on your mortgage could mean missing out on years of market growth.
Non-Financial Considerations
Here are some important non-financial considerations to think about:
1. Personality and Risk Tolerance
If you’re risk-averse, paying off your mortgage might feel safer.
If you’re comfortable with market fluctuations, investing could align better with your goals.
2. Life Goals
Are you aiming for early retirement, a change of career or do you value a debt-free life more?
Your personal priorities will shape your decision.
3. Family and Dependents
If you have a family, the security of a paid-off home might outweigh potential investment gains.
Conversely, if you’re younger or single, you might prioritise growth over safety.
4. Job Loss or Income Reduction
- Mortgage Overpayment Scenario:
If you lose your job or face reduced income, having an overpaid mortgage offers no liquidity.
The extra money you put into the mortgage cannot easily be accessed without selling or refinancing the property, which may be challenging during a financial emergency.
However, once the mortgage is fully paid off, your monthly outgoings reduce significantly, offering a safety net.
- Stock Market Investing Scenario:
Investments in the stock market are more liquid. In an emergency, you can sell shares to cover expenses.
On the downside, if the job loss coincides with a market downturn, you might have to sell investments at a loss, reducing their effectiveness as a safety net.
Key Takeaway:
Investing provides liquidity and flexibility, while overpaying your mortgage offers eventual financial security but no short-term accessibility.
5. Serious Illness or Disability
- Mortgage Overpayment Scenario:
A serious illness can limit your ability to work, and an unpaid mortgage could become a financial strain.
There is evidence suggesting that illness rates have increased post-COVID, particularly due to conditions like Long COVID and rising mental health issues.
Furthermore, disability benefit claims in the UK have surged post-pandemic, with a significant rise in claims related to mental health conditions.
However, if you’ve already paid off the mortgage, your financial burden is significantly reduced.
If you’re still in the process of paying off the mortgage early, the overpayments might leave you with less cash to cover medical expenses.
- Stock Market Investing Scenario:
Investments can act as a financial cushion, offering liquidity for unexpected medical costs.
However, reliance on the stock market during illness adds uncertainty, as the value of your portfolio might fluctuate when you need it most.
Plus, illness limits your earning power, limits your disposable income and ability to invest more funds.
Key Takeaway:
A paid-off mortgage eliminates the risk of repossession during health crises, while investments offer liquidity for medical expenses but come with market risks.
6. General Financial Emergencies
- Mortgage Overpayment Scenario:
Overpaying your mortgage reduces financial risk in the long term but ties up capital in an illiquid asset.
During an emergency, such as a major home repair or unexpected family expenses, you can’t access the equity easily and will need to make sure you have an accessible emergency fund.
- Stock Market Investing Scenario:
Stock market investments are more accessible for emergencies, offering a ready pool of funds.
However, timing matters: if the emergency coincides with a bear market, the funds available may be less than anticipated.
Key Takeaway:
For those who value quick access to funds, investing in the stock market offers a better cushion, but with volatility risks.
Combining the Best of Both Worlds
Why not do both? You can split your extra money between paying down your mortgage and investing.
For example:
- Put 70% toward your mortgage for peace of mind.
- Invest 30% for long-term growth.
- or vice versa.
This balanced approach ensures you’re making progress on debt while building wealth.
You can then adjust these percentages to suit your goals.
Practical Tips for Making Your Decision
- Calculate Your Effective Mortgage Rate:
Compare your mortgage rate to the potential returns of investing. If your mortgage rate is higher, paying it off might make more sense. - Consider Tax Implications:
In the UK, tax-efficient accounts like ISAs (Individual Savings Accounts) make investing more attractive. - Run the Numbers:
Use online calculators to see how different scenarios play out over time. - Focus on Your Goals:
Decide what matters most to you personally: security or growth. - Build an Emergency Fund First:
Before choosing either strategy, ensure you have 3–6 months’ worth of living expenses in a liquid, accessible emergency fund. This mitigates the risk of financial hardship during unforeseen circumstances. - Consider Income Protection Insurance:
To safeguard against job loss or illness, consider income protection insurance, which can cover your mortgage payments or other living costs if you’re unable to work.
Conclusion
Ultimately, whether you pay off mortgage or invest in the stock market depends on your personal circumstances, goals, and risk tolerance 😀.
The smarter move is not just about what makes sense in terms of logical numbers.
For some, the emotional relief of being debt-free is priceless.
For others, the potential for higher returns in the stock market makes it a no-brainer.
Whatever you decide, the key is to take action.
Even small steps, like putting an extra £50 a month toward your mortgage or investments, can have a significant impact over time.
What will you choose? Let us know in the comments—pay off mortgage or invest or both? and why? Comment ⬇️
If you enjoyed this post, check out other posts below.
What to read to pay off mortgage or invest:
- Read the Financial Joy book
- 8 Investments You Must Have by Age 45
- 40 Years Old and Nothing Saved For Retirement? Do This!
What to watching next to pay off mortgage or invest:
pay off mortgage
Thanks for sharing. What’s your main reason?
Great post, there’s a lot to think about here. The point that your personal goals, circumstances and risks tolerance, as well as the value you place on reducing debt vs building wealth, after just as important as the numbers.
Separate point: One thing I’ve tried to find reliable worked examples of (and failed) is mortgage overpayments vs taking a shorter term mortgage with higher repayments.
What are your thoughts on this? Have you covered it in a video before?
Thank you! regarding your question, I think it is a matter of personal choice. The maths is the same, however, if you take a mortgage with a shorter term and higher repayments, you are committed to it. We chose to do that instead as it made us fully committed. However, if you want that flexibility, the you may keep the term of the mortgage unchanged and focus on overpaying.
Thank you for this great article!
lt really helped me with my current decision.
l have decided to invest and overpay the mortgage, as our current interest rate is 3.72% and our payments are £767. We think this is a great amount and would like to capitalise on investing.
Security is a main Value of ours, but we know this can easily encourage a scarcity mindset if we also don’t sprinkle some growth action into our lives (investing)
My question is would you invest if you were me ☺️
If I was you, I would invest, absolutely. However, I’d also overpay a bit but this would depend more on your personal circumstances, which I don’t know a lot about.
This is very interesting. I chose overpayments because the interest rate on mu mortgage was very low(3%). I thought I would use the 5 years fixed interest to overpay before the rate changes. Was that a mistake? Also my strategy was to only pay what was allowed without penalty (10% of the remaining amount to be paid every January). Knowing that this would reduce every year, I was planning to gradually remove the excess and invest in the stock market. I would love to own my home but I also I want to invest in the stock market because of it’s growth and the liquidity. What do you think of my strategy? Thank you again for The Humble Penny.
I don’t think you made a mistake. People often overpay whilst they have a fixed rate in order to reduce the Loan-To-Value and secure a better rate next time whilst getting a guaranteed return. I think definitely making sure that you have a proportion of your money investing in the stock market is a very good thing to do.
Great post..
If you were to add a situation where you had £200k cash to pay off the mortgage in one go would this change decisions?
I’m quite happy with risk but at the same time a mortgage paid off is a pretty big weight off.
If you like risk (and you have some time on your side) and the interest rate on the mortgage is 5%, you’ll do better investing that money in other income producing assets. In addition, it buys you valuable option to pay off the mortgage whenever you want. However, to take the risk, I’d personally want to invest in something that will likely produce 8% to 10% return as a minimum, then let that to compound or gradually use the gains to pay down the mortgage. Read this post about income producing assets: https://thehumblepenny.com/income-generating-assets/