More from Life Figured: See the £100-a-month mortgage overpayment worked example
Extra money at the end of the month can be modelled in different ways. This guide compares two hypothetical scenarios — mortgage overpayments and investing — to show how the assumptions affect the numbers. It does not recommend either option.
An illustrative investing scenario
Take a genuinely realistic example: a £200,000 mortgage at 5%, with 20 years left, and £200 a month to spare. Overpaying that mortgage saves around £26,000 in interest and clears the loan four years early — a solid, real result.
Investing that same £200 a month for 20 years, even at a conservative return that just matches the mortgage rate itself, grows to roughly £82,000. That's not a typo, and it's not assuming an optimistic market — it's the same 5% used evenly, just applied differently. The gap exists because investment growth compounds on the full contribution the entire time, while a shrinking mortgage balance means the interest you're "earning" by overpaying gets smaller every year as there's less balance left to save interest on.
So why does anyone overpay at all?
Because the comparison above quietly assumes something that isn't guaranteed: that the investment actually returns 5%, or more, every year, on average, for 20 years. Markets don't move in a straight line. Overpaying a mortgage can reduce future interest at the applicable rate, but the benefit depends on the mortgage terms, rate changes and any early-repayment charges. It is not an investment return or a completely risk-free decision, because money committed to the mortgage may be difficult to access. Investing has a return that's usually higher on average, over long periods, but with real short-term risk attached.
That trade — certain-but-lower versus likely-higher-but-uncertain — is the actual decision, not a maths error on either side.
Factors that can change the overpayment scenario
- A high mortgage rate. The higher your rate, the greater the potential interest avoided through overpaying, subject to the loan terms, and the harder it is for a risk-adjusted investment to reliably beat it.
- A short time horizon. The investing advantage above depends on decades of compounding. Over just a few years, market risk matters much more and the maths gap narrows or disappears.
- Genuine risk aversion. A guaranteed outcome you can plan around has real value beyond the numbers, especially close to retirement or in an unstable income situation.
- Peace of mind that changes behaviour. Some people genuinely make better financial decisions once a big debt is gone — that's a real effect, even though it doesn't show up in a spreadsheet.
Factors that can change the investment scenario
- The assumed investment return relative to the mortgage rate. Changing either assumption can materially change the comparison.
- The time horizon. A longer period gives compounding more time to affect the illustration, but it does not remove investment risk.
- Tax, fees and employer contributions. These can materially change a comparison and depend on the account, scheme and individual circumstances.
Other factors the comparison does not capture
The simple comparison does not capture every relevant factor. Employer pension contributions can change the economics of pension saving, while access to emergency cash can affect how useful it is to commit money to either a mortgage overpayment or a long-term investment. Check the terms that apply to you rather than assuming the examples here apply directly.
How to use the comparison
Run several assumptions rather than relying on a single investment-return figure. Compare the mathematical outcomes, then separately consider uncertainty, access to cash, mortgage terms, fees, tax, time horizon and risk. The comparison cannot determine which course of action is suitable for you.
This article is general information, not personal financial advice. Investment returns are never guaranteed and can go down as well as up — the figures here use a conservative, illustrative assumption, not a promise. If you're weighing this decision for real, it's worth speaking to a qualified financial adviser who can look at your full situation.
