Is it better to invest your spare cash or pay extra off your mortgage?

Last Updated on 19 August 2026

Is it better to invest my spare cash or pay it off my mortgage?

Many homeowners ask, “Should I pay extra off my mortgage or invest the spare cash in the stock market?” There’s no simple answer, as it depends on several factors, such as interest rates, expected stock market returns and your personal risk tolerance. If you’ve got some spare cash available every month, both are good financial options. We’ll break down both options clearly, so you can make a more informed decision on which is best for your spare money and circumstances.

Should I overpay my mortgage?

When you overpay your mortgage, the extra payment reduces the outstanding balance of the mortgage, which in turn reduces the amount of interest you are charged every month. Over the term of a mortgage, even a modest monthly overpayment can save a significant amount of interest and reduce the time to pay off the mortgage.

There is also a psychological benefit to paying off your mortgage early, especially if you don’t like debt. Overpaying your mortgage reduces the time until you own your home outright, which can provide peace of mind and financial independence.

It’s important to check that your mortgage lender allows mortgage overpayments before you start overpaying. You can check this in your mortgage terms and conditions. Most lenders allow you to overpay up to 10% of your balance without any penalties, but exceeding this may trigger early redemption charges.

Should I invest my spare cash?

Investing your spare cash in the stock market using a tax-free Stocks and Shares ISA potentially allows your money to grow at a higher rate than the interest rate on your mortgage. Historically, the stock market has returned an average of 7%-8% annually, though this is not guaranteed and you can lose money investing.

The key benefit here is the difference between the anticipated stock market return and the interest rate on your mortgage. If your mortgage rate is 4.5% and the stock market returns 7%, you’re gaining 2.5% by investing your spare cash, in theory.

Putting your spare money in a regular savings account is unlikely to provide a higher interest rate than your mortgage rate. In most instances, the savings rate will be lower, as this is how banks make money.

Investing also keeps your money more accessible. Once you’ve overpaid your mortgage, it is not easy to get that money back, whereas with an ISA you can draw out money if you need it.

Should I pay my spare cash into my pension?

When you make personal pension contributions, HMRC effectively gives you the tax back you paid at source through PAYE. Basic-rate taxpayers receive 20% relief on their contributions, and higher-rate taxpayers get 40% relief. For additional-rate taxpayers, the tax relief is 45%. What does this mean? If you want to contribute £100 to your personal pension as a basic rate taxpayer, you only need to contribute £80. HMRC tops this up by £20 (or 25% of £80: 20% of the £100 you earned before 20% tax was deducted).

If you have a spare £100 and pay it into an ISA, all income and capital growth is tax-free. If you put £100 into your pension, you’ll receive £25 from HMRC, increasing your contribution to £125. The pension option provides a larger capital base and potentially bigger returns over time. You can withdraw 25% of your pension tax-free, with remaining withdrawals subject to income tax. From April 2027, unused pension funds will be subject to inheritance tax. You cannot access your personal pension until you are 55, rising to 57 from April 2028.

Let the numbers help you decide

Our calculator runs the figures for both scenarios, so you can let the numbers help you decide which option works best for you. The calculator excludes the pension contribution alternative. Both scenarios cover the same time period, calculating the return if you invest a fixed amount of cash each month while making your required mortgage payments. The second scenario does the maths assuming you increase your mortgage payment, pay off your mortgage early, and invest the payment equivalent in the stock market for the remainder of the mortgage term.

Using the calculator’s default figures, which are:

• A mortgage balance of £200,000
• An interest rate of 4.5% on the mortgage
• A mortgage term of 20 years
• £200 extra payment or spare cash for investing
• A monthly mortgage payment of £1,265
• Investment returns of 7%

With scenario A, the regular mortgage payment of £1,265.30 is made for 20 years, and £200 is invested monthly. In scenario B, the mortgage payment is increased by £200 to £1,465.30 a month. After 16 years, the mortgage is paid off. For the next 4 years, the £1,465.30 is invested monthly. The returns over 20 years are £104,793 with scenario A and £82,170 with scenario B. These amounts will vary, especially with a bigger percentage spread between mortgage rates and investment returns.

Detailed breakdown of the figures

It is helpful to understand the maths behind the figures in more detail. In the above example, under scenario A, where the regular mortgage payment is made, and £200 is invested every month, the figures are:

• Interest of £103,672 on the mortgage
• Total mortgage repayments of £303,672 (£1,265.30 per month)
• Investment contributions of £48,000
• Total of mortgage and investment cash outlay is £351,672
• Value of investment after 20 years is £104,793

In the second scenario, where the mortgage payment is increased to £1,465, and the payment is invested monthly once the mortgage is paid off, the figures are:

• Interest of £80,738, saving £22,934 in interest
• The mortgage is paid off 4 years early
• Total mortgage payments are £280,764
• Investment contributions are £70,320
• The value of the investment in 20 years is £82,170

Why isn’t the interest saved added to the final figures?

You might notice that option 2 saves £33,975 in mortgage interest, but that saving doesn’t appear anywhere in the closing balances. That’s deliberate — adding it would count the same money twice. Both options spend exactly the same amount over the 25 years: £395,973. What differs is where the money goes. Because option 2 clears the mortgage five years early, it only pays £316,778 to the lender instead of £350,754, which frees up £79,195 to invest in the final five years, compared with just £45,219 in option 1. That extra £33,976 of investable cash is the interest saving — it’s the same money, simply spent on investments rather than handed to the lender. It’s already inside the £97,629 closing balance. Counting it again on top would be like using a £10 voucher, spending the £10 on something else, and claiming you’re £20 better off.

Mortgage payment vs investment calculator

Some comparative figures

Basing the calculations on a mortgage of £200,000 and £200 spare cash, the following comparative figures illustrate returns at different interest and investment rates.

No. of years	Interest rate	Invest ROI	Investing	Overpaying
20	5.5%	7%	£104,793	£90,429
25	5.5%	7%	£162,959	£135,691
20	3.5%	6%	£92,870	£73,290
25	7.5%	6%	£139,292	£167,174

Split between overpayment and investing calculator

What if you’d like to assess the impact on your finances from splitting the extra cash between your mortgage and investing? The calculator below provides these estimates for you.

Which option is best?

As a general rule, if your mortgage interest rate is low and investment returns are good, investing in the stock market (using an ISA) is the best option. When interest rates are high and markets are uncertain, overpaying on your mortgage is usually the better option. Ultimately, it comes down to the economic landscape and your particular circumstances and long-term plans. If you are hoping to start your own business in the future or retire early, then paying off your mortgage sooner may be your top priority. You need to run the figures and align them with your long-term objectives, and decide which works best for your situation.

For more worked examples of overpaying your mortgage versus investing spare cash, take a look at our article on paying off your mortgage early.

Should I pay off my mortgage early? – Moneyquids

A few other factors to consider

• Make sure you have a healthy emergency fund before committing spare cash to your mortgage or investments.
• Does your employer match your pension contributions? If so, it may be beneficial to maximise your personal pension contributions, taking advantage of pension tax relief, particularly if you are a higher-rate taxpayer.
• Investing in the stock market is a long-term venture of at least 5 years. Share prices can go up or down. Withdrawing funds when the market is down can result in losing money.
• When investing, make sure you use a stocks and shares ISA, so that dividend income and capital growth are tax-free.
• If mortgage interest rates are low and stock market returns are good, it is usually more efficient to make your regular mortgage payment and invest any spare money. When interest rates are high, the opposite holds, where increasing your payment and reducing the capital balance is better.
• If you are a higher-rate taxpayer, consider contributing the spare funds into a personal pension, taking advantage of tax relief on pension contributions.
• Consider your longer-term financial objectives and your risk profile.