When interest rates are high or rising, you might wonder: “Should I pay off my mortgage or invest? Which strategy will put me financially ahead in the long run?”
Very low interest rates following the global financial crisis made larger mortgages much more affordable.
At the same time, strong returns from investing [1] trounced the relatively low savings you made from paying down your mortgage instead.
With hindsight then, investing in the markets during the very low interest rate era [2] was much more profitable compared to paying off your mortgage early.
However this comfy state of affairs was upended when rates rose fast [3] in 2022.
Anyone who hadn’t properly stress-tested [4] whether they could handle higher interest rates had a rude awakening when, say, their 2% five-year fixed rate deal expired and they had to remortgage at 6% or more [5].
It was a reminder that paying off a mortgage will always be worth considering. Debt can be deadly. Owning your home outright can be financially liberating, whereas running a mortgage comes with risks.
Very few people who pay off their mortgage regret it.
But this is Monevator. We like to kick things around – and sometimes to do things differently.
Where do we stand today? I’ve updated this article and our spreadsheet to reflect higher interest rates since it was last updated in January 2022. But remember mortgages are a long-term commitment – you’ll probably see multiple cycles of rate rises and cuts over the full term. Assess the risks [6] accordingly! Only you can decide what’s right for your situation.
Pay off the mortgage or invest?
Borrowing to invest [7] is typically a bad idea.
- Returns from investing are uncertain and volatile.
- Debt – and the cost of debt – is a certain liability.
However mortgage debt [8] is relatively cheap and manageable. I believe it’s the only way most people should consider borrowing to invest.
A mortgage is money rented [9] from a bank. Typically we use that money to buy a property. But if we delay repaying the mortgage to build an investment portfolio, we’re effectively using the mortgage to invest.
In this scenario our home stays mortgaged for longer, like an investment property.
It’s almost as if you’re a landlord [10] – someone who borrows money from a bank on your behalf – except you’re your own tenant [11].
If you trust yourself to meet your mortgage payments whilst also saving into an investment portfolio for the next 25 years, then with average investing luck you’ll probably end up better off investing versus repaying the mortgage.
However there’s a lot to think about when deciding whether to pay off the mortgage or invest. The decision is as much about risk – and emotions – as any reward.
Come with us via the scenic route! We’ll tour the landscape, and wind up at a calculator that enables you to further explore the options.
First things first: Non-mortgage debt must go
Have you got credit card or store card debt or any personal loans? Get rid of that debt [12] first.
Student loans may be an exception, as MoneySavingExpert explains [13]. Think carefully before repaying any student loans.
The interest rates on credit cards and loans are much higher than on a mortgage. Credit cards typically charge 25% or more.
That rate is almost triple the average returns you could expect from the stock market.
The risk/reward equation of trying to grow your money faster than you’re losing out due to expensive debt is terrible.
Running a credit card debt at 25% while investing in shares is like rowing across the channel on a raft made from chicken wire.
At 7% or even 8% – a very cheap personal loan – the maths might work. (Though I don’t think it’d be worth the risk).
At 25% it definitely doesn’t.
If your already-optimistic 10% stock market returns are sapped by taxes and costs [14], then even loan rates of 7% aren’t worth thinking about.
And many people would expect much lower returns [15] from a diversified investment portfolio – perhaps as little as 4% to 6% from today’s levels, though investment giant Vanguard for one is a bit more optimistic [16].
In short – unless you’re Warren Buffett [17] – only mortgage debt is cheap enough, given the risks, costs and taxes, and likely returns from investing.
What about margin? Some gung-ho sophisticated investors use margin debt [18] from a broker to fund property. The risks are magnified because unlike with a mortgage, margin debt is marked-to-market [19]. This means that if stocks fall, you must stump up more assets or else repay the debt. The strategy can work, but it’s well beyond the scope of this article. I suggest 99.9% of readers push away thoughts of margin debt. With a 20-foot barge pole.
Pay off your mortgage: a good, safe option
If you can pay off your mortgage early, you’ll be in a great place financially.
There is no law of smart investing that says you should do anything other than pay off your mortgage first.
Many people would kill to be mortgage-free.
Crucial point alert! Repaying a mortgage is a form of saving [20]. If you pay £10,000 off your mortgage with a cash windfall, it has the same impact on your net worth as putting it into a savings account. When you pay down the debt, your (negative) mortgage balance is made £10,000 less negative. When you save the money, your (positive) cash balance is £10,000 higher. Your net worth – assets minus liabilities – is the same in both cases.
Repaying your mortgage is usually a better option than saving in cash.
The average cash savings account pays 3% as I write – and you can do better if you shop around.
Most new mortgages charge a lot more. So unless you’re still on some dreamy super-low fixed mortgage rate from the old days, you’ll probably earn a higher return paying off your mortgage and avoiding interest compared to earning interest on cash.
Taxing matters
Indeed depending on your personal tax situation and where you hold your savings, the benefits of paying down your mortgage can be even bigger.
Once your personal savings allowance [21] is exceeded, interest income on cash outside of an ISA is taxed.
In contrast, paying down your mortgage delivers a tax-free return via those future interest payments that you’ll never need to pay.
Note that you should still have an emergency fund [22] before investing or making over-payments on your mortgage. Just in case you need cash in a hurry.
If you for some reason you want to hold even more cash at the same time as a mortgage – say if your income fluctuates a lot – then consider an offset mortgage [23].
Pay off your mortgage to get out of debt early
Paying off a mortgage early will slash the years you’ll live in debt.
Imagine you borrow £250,000 at 4% over 25 years.
- According to the Monevator mortgage calculator [24], you’d pay £1,320 a month, give or take a Mars Bar.
- Our calculator also handles over-payments. Let’s say you can bring your monthly payment up to £1,600 by overpaying £280 a month.
- You’ll save £42,151 and cut nearly seven years off the life of your mortgage.
The red line in the graph below shows how overpaying accelerates your mortgage repayment schedule:
[25]
I’m ignoring a few things here, especially inflation [26] and the time value of money [27].
If you go shopping with £280 today it’ll buy much more than in 25 years time.
But that would be true too if you kept that £280 in cash or invested it in a fund. So we can ignore inflation when comparing these options.
More reasons to murder your mortgage
Paying off a mortgage early is a great aspiration, and for good reason.
Being debt-free is mentally liberating [12]. Pay off your mortgage early and you experience that benefit sooner and enjoy it for longer.
Other pros of paying off your mortgage include:
- It’s a guaranteed return. You’ll earn whatever interest you save, unlike the variable and unknown returns from the stock market.
- It reduces risk. The smaller your mortgage, the less chance a financial upset like unemployment, illness, or divorce sending your finances spiralling out of control.
- It’s simple. There’s no fussing with funds or shares or anything else. Just throw any spare money at your mortgage!
- You can remortgage to a cheaper rate [28] when you’ve built up more equity in your home. That will save you even more money.
- You may be happier investing in volatile shares when you have no mortgage. You should have more spare cash to do so, too.
- Selling your home is tax-free [29]. If you sell up and go traveling, say, you’re not taxed on any gains you make on realising your own home investment [30]. If you’d instead invested spare cash outside of an ISA or a SIPP, you might. True, the ISA and pension contribution limits are very generous – £80,000 in total in a year – so that usually won’t matter. But it may be best to put big windfalls like bonuses or inheritances into paying off your mortgage, rather than investing outside tax wrappers.
You can be too clever in life. Paying off the mortgage is hard to beat. I’ve never met anyone – aside from online commentators – who regretted it.
Now, personally I run an interest-only mortgage [31] in pursuit of higher returns. While this got hairy [32] in recent years when rates rose, I don’t regret it [33].
But I would never chastise anyone who chose to clear their debts ASAP instead.
For the average wage slave, being mortgage-free [34] is one step to nirvana [35].
Invest instead: risks and rewards
Okay, let’s look at the case for investing.
There’s only one reason to invest instead of paying down your mortgage.
You hope investing will leave you richer!
The long-term average return [36] from developed world stock markets depends on how you measure it. But it’s in the ballpark of 7-10% a year.
Real or nominal returns? The 7-10% returns I quoted are in nominal terms – with no adjustment for inflation. Often we prefer to talk about real (that is, inflation-adjusted) returns with investing. But it makes more sense to use nominal figures when comparing whether to pay off your mortgage or invest, because your mortgage calculations will also use nominal figures. Indeed you might even consider your mortgage a hedge [37] against inflation, since inflation erodes the real value of your debt over time.
Returns of 7-10% returns from investing (if achieved) compare well even to mortgage rates of 4-6%.
The catch is you can’t get a mortgage to buy shares.
However by running a 4% mortgage, say, and investing spare cash into the market instead of paying off your mortgage, you might earn 7-10% over the long-term from your portfolio, and pocket the difference.
Is it worth it?
At the very least your portfolio needs to deliver higher returns1 [38] than your mortgage rate for investing to be profitable.
But considering the risks of investing, you’ll want to do much better than just scraping ahead for the uncertainty to be worth it.
Aiming for a high return means investing in riskier assets – specifically shares [39].
And shares are volatile [40]. Your portfolio’s value will fluctuate. You could suffer a deep bear market [41] where you’re down 50%.
Over a typical 25-year mortgage term, you’ll likely see a couple of very big declines.
Worst of all, there’s no guarantee that even a globally diversified equity portfolio will do better than paying off your mortgage. Only historical precedent.
This is all very different to the certain return you get from paying down a mortgage.
House prices are volatile, but your mortgage balance isn’t. It’s irrelevant if house prices fluctuate when it comes to the returns you see from paying off the mortgage or investing. You’ve already locked-in the purchase price of your home. Paying off the associated mortgage delivers a known return. Investing earns an uncertain one. House prices fluctuate regardless.
How to invest instead of repaying your mortgage
Regularly investing [42] into index funds is the best approach for most.
Investing globally diversifies your money across many stock markets. That way you’re not exposed to any one country, sector, or region.
Index funds will get you the market return at the cheapest cost [43].
We think a global tracker fund [39] is the only equity fund most people need.
If you wanted to try for higher returns, you could tilt [44] your passive portfolio towards value shares [45] and small caps [46], especially early on when you’ve more time to make good any disappointments.
There’s no guarantees you’ll not do worse for trying to do better, though.
If you’re a naughty active investor [47], you’ll have your own ideas about how to invest to beat paying off your mortgage.
Just remember that the ownership of your home could be at stake if you can’t meet your mortgage payments. This should influence the risks you take!
Interesting choice
Suppose you have an interest-only mortgage.
If you can’t repay it at the end of the term because your bets on Bitcoin or blue-sky biotechs blew up, you’ll probably have to sell your home to repay the bank.
Invest wisely!
More commonly you’ll have a repayment mortgage.
Here it’s only your potential over-payments on the mortgage that you’re instead directing into investing.
You’ll still pay off your mortgage over 25 or 30 years with regular monthly mortgage repayments.
So investing whilst running a repayment mortgage is less risky than opting for an interest-only mortgage.
True, if your investing does well you’ll make less money with a repayment mortgage than if you’d gone interest-only.
But it may still have been worth it to reduce risk. You’re already taking on risk by investing in shares instead of clearing your mortgage, remember.
Equities are your growth engine
What about other assets – like bonds [48]? They’re usually part of a passive portfolio, right?
The trouble is that as you add safer assets to counter the volatility of your equities, you also reduce expected returns.
And this really matters here, because you’re pitting investing against the certain return you can get from repaying your mortgage.
Is it sensible to put 40% of your portfolio into a bond ETF returning 4%, when you could use that money to pay off mortgage debt costing 5%?
On the face of it, no – except there’s more to diversification [49] than that.
Up to a point, adding safer government bonds to an equity portfolio will reduce risk (volatility) more than it reduces returns.
And a smoother ride can make it easier to stick to your investing plans.
Still, if you’re going to invest instead of taking the safer return earned by repaying your mortgage, you’ll probably want to invest pretty aggressively.
Equities should probably comprise at least 70% of your portfolio if you’re to have a good shot of making all the risk and uncertainty worthwhile.
On which note…
You might regret investing, if you’re unlucky
Know that there’s no guarantee [50] you’ll do better by investing.
Sure, historical stock market returns [51] suggest that over a mortgage term of 25 to 30 years you’d be unlucky to lose out.
That’s assuming you invest regularly, mostly in equities, and stick with it through the tough times.
But the past is no guarantee of the future.
Also, just like retirees you face sequence of returns risk [52], especially with an interest-only mortgage.
Because what if the stock market crashes a year before your debt is due?
Course correct as you go
Luckily you have some flexibility over a long mortgage term.
For example, if your investing portfolio shoots the lights out for a decade, you might change gears and shift to paying off your mortgage instead. (As opposed to pushing your luck into a stock market bubble [53].)
You could even sell some of your bulging portfolio to repay your mortgage early. The best of both worlds!
Avoid early repayment charges. Take note of your mortgage’s fine print. Most lenders only allow a portion of the balance or initial advance to be repaid each year without penalty – for example 20%. You can still sell down your portfolio by more than this if it seems appropriate. Just keep the proceeds in cash, and pay off your mortgage as the terms allow.
Alternatively, you could simply use new cash from your salary to overpay your mortgage. Your existing portfolio could then be left to (hopefully) keep growing.
Watch the direction of interest rates! What made sense with mortgage rates at 4% will look very different if you must remortgage at 7%.
It’s essential to use tax shelters
You’ll want to invest in a tax shelter to keep all your returns [54]. Either an ISA or a SIPP2 [55].
If you pay tax on your investing gains then your subsequently lower returns will struggle to beat paying off the mortgage. Once you take risk into account, it’s almost certainly not worth it.
Note though that there’s a snag with relying on a SIPP to shelter your investments, especially if you have an interest-only mortgage. Access to pension cash is restricted by age.
What if you find you want (or need) to repay the mortgage sooner than you’d expected to, and all your money is in a SIPP?
In that case you’d have to wait until you’re allowed to withdraw money from the SIPP – so into your late-50s. You might then use your pension’s tax-free lump sum [56] to pay down your mortgage.
But until then you’d be stuck.
Investing while running a mortgage for normies
Of course, most people have a mortgage whilst they earn a salary and pay into a pension – and for much of their working life.
Like this they too are funding their pension via that mortgage debt, as we’ve discussed above.
But few will ever think of it that way. Including many of those who criticise articles like this one!
As for ISAs, their tax-free status is such a boon we’ve suggested [57] that opting not to repay a big debt – like a mortgage – or even taking out new debt might be worth it just to use as much of your annual ISA allowance [58] as you can. This way you can best build up your tax-shielding capacity for the future.
ISAs are accessible at any time, too. This flexibility might be crucial if your plans change.
Long story short: think carefully about how and where you run your assets. If you decide to invest instead of paying off your mortgage, you’ll probably want to use both ISAs and a pension.
More reasons to run a mortgage and invest
- Time diversification. Investing in equities is for the long-term. But if you wait until you’ve paid off your mortgage before investing, you’ll have a shorter time horizon.
- Experience. You need to get used to volatility in risky assets. Starting young helps.
- Asset diversification. There’s much more to the economy than house prices. Do you want all your eggs in the property basket while you pay off your mortgage?
For my part, I run an interest-only mortgage while investing mostly in equities. I’ll probably keep doing this until either my mortgage rate rises substantially or I can’t find any markets worth investing in.
Higher rates since 2022 have made it a tougher decision for sure. But I judge it’s still the best long-term strategy for me. As for the near-term, interest rate cuts [59] are coming.
Investing will not be the right choice for everyone – or even most people – and this is not personal advice!
So do your own research. Properly weigh up the many benefits of paying off your mortgage instead.
Mortgage repayment calculator/spreadsheet
To help you decide whether to pay off the mortgage or invest, we’ve created a calculator [60] embedded into a Google spreadsheet that can help you calculate and visualise the potential returns.
(Thanks to Monevator reader ArnoldRimmer [61] for the initial work here.)
Open the spreadsheet [60] in a browser. Then make a copy of the sheet. You can now edit your copy to play with the numbers for yourself.
If you share the sheet with friends or family we’d love it if you’d send them to the original sheet please. It includes a link to this article, so they can read all the important background information.
The six yellow cells are the ones to edit to try out different outcomes.
The spreadsheet runs the numbers on four scenarios:
- Repayment mortgage. No extra savings – you spend your spare cash.
- Repayment mortgage with mortgage over-payment.
- Repayment mortgage, but investing instead of making over-payments.
- Interest-only mortgage. Investing instead of any mortgage payments.
You input the mortgage size and term, interest rates, amount of cash directed to either over-payments or investing, and your expected return.
The table below plays out those numbers over 30 years.
The first four columns shows your growing net worth from repaying the mortgage and/or investing. The final two columns shows your portfolio growth, without netting off the mortgage balance.
The cells flip to green when your net worth becomes positive and you repay your mortgage – or you could do so from (tax-free) investments.
Remember: real-life returns are not smooth. Calculations like this can only give an indication of how an annual return would compound over time. In reality annual returns would be lumpy. Some years they will be negative. Perhaps very negative. Your investment portfolio will go down, maybe by a lot! Do not expect an easy ride.
Our spreadsheet lets you explore what’s possible – but it cannot map the future, which is unknowable.
Scenario planning 101
For example, the spreadsheet tells us that a £250,000 mortgage charging 2% over 25 years with £250 a month in either over-payments or investing at a 7% return delivers:
[62]
You can see with this example that investing whilst running the mortgage would leave you much better off (Scenarios 3 and 4).
But simply over-paying your mortgage is financially good, too (Scenario 2).
And even in the first scenario you had £250 a month extra to spend on fun. The extra gains in the other three scenarios didn’t come for free.
Perhaps you object to this interest rate or investment return? After all, mortgage rates are now much higher than 2%, and are probably set to stay higher.
That’s fine and I agree. It’s the whole point of making this spreadsheet editable.
With this update I’ve increased the default mortgage rates to 4.5% and the mortgage size to £300,000.
But you can create your own copy and try out whatever figures you think are realistic.
Remember real-life investing is volatile and uncertain, whatever numbers you use. If it wasn’t then this strategy would be a no-brainer. It’s not, because the potential downside is real, especially over shorter periods.
Our spreadsheet is a guide to what might play out over 25-30 years – a hypothetical future seen through a rear-view mirror.
You mileage will definitely vary.
So… pay off the mortgage or invest?
The decade or so after the financial crisis was very kind to investors. Most markets did well [63], especially the heavyweight US.
At the same time – and not coincidentally – interest rates stayed low.
In hindsight it was a great time to invest rather than pay down a mortgage.
I’d even argue this wasn’t completely unforeseeable.
After the March 2009 [64] rout, the odds of superior returns – greater than 10% – from shares over the medium-term looked pretty good.
I wrote that year that a decade of 20% a year returns [65] seemed possible, given the crash we’d just seen.
If you invested the money you saved in lower mortgage payments in those gloomy times, you deserve applause – or maybe your own hedge fund [66]!
But were the record numbers [67] then paying off their mortgages chumps?
I don’t think so.
As I said at the start, paying off your mortgage is never a bad idea. There are financial benefits, and it reduces risk. There are non-financial wins, too.
One lump or two?
Remember our spreadsheet only shows smooth growth over the years.
In reality it would be a wild ride of unpredictable annual highs and lows.
And markets today look much more expensive. Interest rates are higher. It does not seem such a propitious time to fund an investment portfolio via a mortgage, compared to 2012 say.
For disciplined investors with broad shoulders and girded loins, running a mortgage while investing will probably still win in the long run.
But do your research, think about risk tolerance [68], and make your own mind up.
Note: This article was first published in 2011, heavily updated in January 2022, and updated again in September 2024. As usual I’ve retained all the reader comments below – they provide fascinating insights as rates fall and rise over time. But do check when a comment was posted for full context.