“Overpay the mortgage or invest?” is the question I get asked most, and it’s usually answered with a rule of thumb: if your expected return beats your mortgage rate, invest. That’s not wrong. It’s just incomplete, and the incomplete bit is where people go astray.
The rule of thumb, stated fairly
Overpaying the mortgage gives you a guaranteed, tax-free return equal to your mortgage rate. Investing gives you an expected, and usually taxed, return that might be higher — or might not, especially over shorter periods. So the maths question is really: is the extra expected return worth the extra risk?
A worked example
Say you have £500 a month spare and a mortgage at 4.5%.
- Overpay: you save 4.5% a year, guaranteed, and you chip real years off the term. There’s no bad-luck scenario. The downside is that the money is locked in the house until you sell or remortgage.
- Invest: at a long-run 6–7% before tax, you’d likely come out ahead over 20 years — on average. But “on average” hides some genuinely uncomfortable five-year stretches, and the gap narrows once tax and fees are in.
Over a long horizon, investing usually wins on paper. Over a short one, the guaranteed return often wins in real life.
The part the maths leaves out
Guaranteed beats probable when the probable outcome would keep you up at night. A smaller mortgage is a smaller fixed cost every month, which is worth something no spreadsheet captures: flexibility if your income wobbles.
My honest answer is rarely “all one or the other.” It’s usually: clear expensive debt first, keep an emergency buffer, then split the surplus — and stop treating a close call as if there’s a single right answer.
Who's writing
I'm a senior manager at a UK accountancy firm, with a particular interest in construction and inheritance tax — and, off the clock, a parent of three under three. Carried Forward is where I write about money, work, and the decisions that shape both, in plain English and without the jargon.