Mortgage: Overpay or Invest?

The comparison. Every plan spends exactly the same money each month: your scheduled mortgage payment plus the spare amount (plus the lump sum in month one). The overpaying plan sends the spare money to the mortgage; once the mortgage is cleared, the whole budget — freed-up payment included — is invested in your chosen wrapper. The investing plan pays the mortgage as scheduled and invests the spare money from day one. Both are measured at the same finish line: the end of your current term, when both are mortgage-free, so the final pots compare like for like.

Mortgage maths. Standard repayment mortgage: monthly interest is the annual rate ÷ 12 (the UK convention — which makes the effective annual return on overpaying slightly higher than the quoted rate), payment from the annuity formula. Overpayments shorten the term; the monthly payment is left unchanged. The rate is assumed constant for the whole term — in reality your fix will end and the sums change, so rerun this when it does.

Overpayment allowance. Each 12-month block allows penalty-free overpayments of the percentage you set, applied to the balance at the start of that block. Spare money above the allowance is invested rather than paid over, because real early repayment charges (typically 1–5% of the excess) almost always cost more than the interest saved. Lenders differ — some use the original loan amount or the calendar year — so check your offer document.

Investment growth. Your expected return compounds monthly (annual rate converted to its monthly equivalent). Enter a figure net of fund and platform fees. It is treated as arriving smoothly, which flatters investing: real returns are volatile, and a bad early sequence can leave the pot behind for a decade.

Stocks & Shares ISA. Completely tax-free. The £20,000 annual subscription limit is not enforced by the model, but you are warned if the plan would breach it in year one.

Taxable account (GIA). 2 percentage points of the return is treated as dividends, taxed each year above the £500 allowance at your band's rate (8.75% / 33.75% / 39.35%); the rest is capital growth, taxed on sale at the end at 18% (basic) or 24% above the £3,000 annual exempt amount, applied once. Realising gains gradually over several years, or moving money into ISAs as allowances renew ("Bed & ISA"), would cut this drag — so the GIA figures here are conservative.

Pension. Contributions are grossed up by relief at your marginal rate (the relief-at-source model including any higher-rate reclaim); National Insurance savings from salary sacrifice are not included — see the marginal tax calculator for those, which make pensions better still. On the way out, 25% is assumed tax-free and the rest taxed at basic rate: 85p kept per £1 of pot. The £60,000 annual allowance and the minimum access age of 57 are not enforced — the pot shown may not be touchable when your mortgage term ends. Note that because the overpayer's freed-up money after an early payoff is also invested with the same relief, tax relief largely cancels out of the overpay-versus-invest comparison: it multiplies whichever pot you end up with rather than moving the break-even.

Offset mortgage. Savings in the offset account reduce the balance that interest is charged on — mathematically the same as unlimited overpaying, except the money stays withdrawable. The offset row uses your rate plus the premium you set (offset deals usually price higher) and its own correspondingly higher scheduled payment, funded from the same total budget. Once the savings fully cover the balance the mortgage is treated as cleared and everything is invested from then on.

What is left out. All figures are nominal — inflation erodes both the debt and the pot, and is deliberately ignored since it applies to both sides. No house-price effects (you own the same house either way). Tax figures are 2026/27 for England, Wales & Northern Ireland; Scottish income-tax bands differ but the dividend, CGT and ISA rules are UK-wide.