Overpay mortgage or invest? It’s a question that many homeowners find themselves asking. When you come into a lump sum of money, it can be difficult to work out what you’d like to do with it. If you own a property with a mortgage, you might want to look into bringing that mortgage balance down. After all, if your average monthly payment is really sapping your finances, it makes sense to look at getting those rates down with a serious payment.
However, it might also be worth looking into investing your money for potentially bigger returns. The fact is, if you reduce the amount you pay on your mortgage, you will still find yourself tied to your lender. If you really want to grow your money, you might find that an investment opportunity is your best shot at making the most of that cash.
In this guide, I’ll take a look at which option might be best for you, and consider the various ins and outs you should take into account.
Overpaying Mortgage vs Investing
When it comes to overpaying your mortgage, home owners will find that they can take advantage of saving a significant amount of interest by paying extra towards their mortgage balance, as it will reduce the overall term of the mortgage.
However, investing your money wisely instead could result in you freeing up even more cash. Providing you monitor the markets well, and do plenty of research, there are no reasons why you won’t be able to make investing in stocks and shares work for you.
That said, you need to consider risks. There are risks in investing, but there can also be things to consider with mortgage overpayments, too. You’re going to need to think about any other debts you may have that you need to repay, for example.
What’s more, you need to think about the future. Are investments, or paying off your mortgage, really going to generate enough cash for your family to live on? Should the worst happen to you, you’re going to need to make sure you have money set aside for them.
Therefore, there may be some cases where neither overpaying a mortgage nor investing is the right choice. Your circumstances are always going to dictate what’s going to work best for you.
Let’s consider a few more points and issues which should inform your decision making process.
Overpay Mortgage or Invest? What to Consider
Consumer Debt
Before you take any of these steps, do you have consumer debt piling up? By consumer debt, I’m referring to credit cards and personal loans. You may even have store cards in your name that are driving up your debt and which are negatively impacting on your credit score.
Therefore, always make sure you have your debts clear before you reach for that overpayment calculator. Your credit is going to be in fantastic shape if you can show that you’ve spent a lump sum clearing up low level debts. This goes for whether or not you’re into home ownership or otherwise!
Emergency Fund
Have you considered setting up any kind of emergency fund? Before you go ahead and throw a lump sum of money into your mortgage or investments, always make sure you have a backup in place. If you come into a large amount of money, it’s going to be worth saving at least three months of expenses.
This means that if you and your family do need to make a major expense or two without planning ahead, you have something to fall back on.
Interest Rate
Let’s consider how interest plays out when it comes to overpaying your mortgage. As stated, you can overpay and avoid having to dish out that monthly interest, which might already be sapping your bank account. However, if you’re already registered on a mortgage that’s particularly low rate, there might not be much point. In a rising interest rate environment though, it might make sense to at least partially reduce your debt burden by paying off your mortgage a little bit faster.
Think about it this way – it’s going to be more financially viable for you to save money if you’re on a mortgage rate with a heavy interest burden. If your interest isn’t as bad as it could be, there might not be much point paying off.
Overpayment Limitations
Of course, there’s also the fact that not all mortgage lenders are going to be open to you overpaying. Some lenders and banks will have limits in place on how much you can overpay. This is always something you should check before agreeing to any kind of mortgage.
What’s more, a lender or bank might even add in overpayment charges, where you will have to clear extra funds for the privilege of paying off.
Pros and Cons
Let’s recap on the pros and cons of either option.
Overpaying Your Mortgage
- You’ll be able to clear any debt you have remaining, meaning you’ll save money on interest the bank will demand from you in the months to come.
- You’ll be able to concentrate on saving money, or investing, each month. There will no longer be the need for you to keep money aside for your mortgage.
- However, some lenders and banks might not let you pay off early.
- What’s more – it might be more financially viable for you to save your money, or pay off other debts.
Investing
- Investing money means you have a great chance to make your cash grow over time.
- What’s more, you’ll be able to take your money away if you feel your stocks and shares aren’t performing as they should.
- However, there is always risk involved with investing. There’s nothing to say you won’t lose money on the markets unless you really do your homework.
- There’s also the fact that saving money guarantees you have cash there when you really need it. Some people see investing as a bit of a gamble, and it can get complex.
Conclusion
Overall, it’s your choice – if you really want to break free from your mortgage for the sake of security, then that’s clearly the choice you should take. However, if you’d prefer to grow your money, then investing is a clear route forward.
Ultimately, it’s different choices for different types of people – what’s going to give you the most financial security? You should also consider whether or not pay off your mortgage or invest once you have clear savings in place, too.
