Overpay your mortgage or invest

The calculator runs two versions of the same household, month by month, over the mortgage’s remaining term. Both spend exactly the same each month. In one, the extra money goes into the mortgage. In the other, it goes into the investment you pick, and the mortgage runs to the end of its term as normal.

The monthly payment comes from the standard repayment formula: balance × r ÷ (1 − (1 + r)⁻ⁿ), where r is the yearly rate divided by 12 and n is the number of months left. On £200,000 at 4.5% over 25 years that’s £1,112 a month. Overpaying keeps that payment the same and shortens the term. Adding £300 a month clears the mortgage 8.1 years early and saves £47,708 of interest.

Once the mortgage is paid off, the overpaying household invests everything it was paying (the regular payment plus the overpayment) at the same return as the other. Both are compared at the end of the original term, when neither has a mortgage left, so the gap between them is the gap between their investments.

The overpayment allowance

Most fixed and discounted deals let you overpay a set share of the balance each year without an early repayment charge, often 10%. The calculator caps overpayments at that allowance until the fixed rate ends, measured on the balance at the start of each 12 months, and invests anything over it instead. It never charges an early repayment charge, and after the fix it assumes no limit.

Assumptions

• The mortgage rate stays the same for the whole term. In practice it changes each time you remortgage.
• The return is a smooth yearly average, before tax and after fees. Real returns vary and can be negative for years at a time.
• Figures are in today’s pounds without inflation, and the first 12 months are treated as tax year 2026/27.
• The £20,000 ISA allowance and £60,000 pension annual allowance aren’t applied. The calculator flags a year that goes over them.

Overpaying is a guaranteed return equal to your mortgage rate, tax free, because interest you don’t pay is never taxed. Investing comes out ahead only if the money earns more than that after tax. In the worked example, investing £300 a month in an ISA at 5% ends £7,047 ahead after 25 years, but the margin depends entirely on that 5% turning up. The break-even return, 4.59% here, is the yearly return the investment has to average just to match overpaying.

The wrapper matters because tax comes off the investment and not the mortgage. With the same figures, a general investment account needs about 5.07% and taxable cash savings 5.4% for a basic-rate taxpayer.

• Stocks and shares ISA: no tax on growth or withdrawals.
• Pension: the provider adds 20% relief at source, so £80 paid in becomes £100. Higher and additional-rate taxpayers reclaim the rest through their tax return; you choose whether that’s paid back into the pension or left out. Scottish taxpayers can pick their own rate. Pension figures are what the pot would pay out after basic-rate tax on the 75% that isn’t tax-free, with the tax-free part capped at £268,275.
• General investment account: part of the return is paid as dividends, taxed each year above the £500 dividend allowance and reinvested. The rest is a capital gain, taxed as if everything were sold at the end, above the £3,000 annual exempt amount, at 18% for basic-rate and 24% for higher-rate taxpayers. It assumes those allowances aren’t used elsewhere.
• Cash savings: interest is taxed each year above the personal savings allowance. The starting rate for savings isn’t modelled.

Access to the money

Money paid into a mortgage is hard to get back. Unless the mortgage is flexible or offset, getting it out means remortgaging or borrowing again. Money in an ISA or savings account can usually be taken out when needed. Pension money can’t be touched until the minimum pension age.

Risk

Overpaying can’t lose money. Investments can fall, sometimes for years, and a 25-year average hides a bumpy path. A lower return than expected in this calculator shows what that does to the result.

Your next mortgage deal

A smaller balance means a lower loan-to-value when a fixed rate ends, which can open up lower rates on the next deal. The calculator doesn’t model that, or a rate change at the end of the fix. The balance when the fix ends shows how far overpaying moves it.

Early repayment charges

Overpaying beyond the allowance during a fixed or discounted deal usually triggers an early repayment charge, often a few per cent of the amount over the limit. Many people also keep an emergency fund and clear more expensive debt, such as credit cards, before doing either.