Pay Off Mortgage Early or Invest? - The Humble Penny (2024)

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Should you pay off mortgage early or invest through the stock market?

This is the subject of much debate, and it remained so when I was invited to speak a few months ago on this topic only a few months ago.

Also on the panel was the CEO on PensionBee and the CTO of Habito. For me, it was an honour to sit alongside these well accomplished individuals.

The event was the UK Money Bloggers conference (Shom*os) and the audience was made up of my blogging colleagues in the money world.

The panel discussion was lively with sound cases for both paths, although what was very clear was that becoming mortgage free was very attractive.

Although pretty much everyone in the room was already investing through a pension or an ISA, only a handful were mortgage free.

As someone who has a perspective from both camps, I can share my experience and give you a framework that you can use to make that decision uniquely for yourself.

In addition, I'm going to show you what the advantages and disadvantages are of paying off your mortgage early versus investing through the stock market.

Or whether you should be doing both in your own personal situation.

So let's dive straight in and unpack which way you should be going, how exactly you should be making that decision in order to suit your own personal circ*mstances.

Image from the panel discussion that I mentioned above:

https://www.instagram.com/p/B2aDAEZFV1d/

Pay Off Mortgage Early Or Invest?

We'd recently made a video called how we paid off our mortgage in 7 years and that video proved to be really popular because for lots of people, paying off their mortgage is quite a big deal.

However, when you Google “pay off mortgage early or invest”, a lot of the experts out there would focus on the need to do complex mathematical calculations…

Just to prove that investing through the stock market is exactly what you should be doing.

Lots of them will say things like, “you can make an 8% return. Why on earth would you want to be paying off a mortgage with such low interest rates?”.

Today I want to take a slightly different view.

I want to zoom out a little bit and look at this idea of paying off your mortgage versus investing from my own experience…

And from the realities of life, which are that to be honest, life never carries on a straight line and past performance never really informs future performance.

The way to decide whether you should pay off mortgage early first or whether you should invest through the stock market or do both, is to start by looking at two main things.

1. Look at your long term objectives or goals.
2. Consider your day to day personal circ*mstances.

I.e. What's life like at the moment? What is your state of health, what's your job situation like? What's your current level of savings? Etc.

These two combined together tell a much bigger story.

Objectives fit into a much bigger framework that I personally refer to with your P.O.S.T, which stands for your Purpose, Objectives, Strategy, and Tactics.

Purpose – is your Why i.e. why does paying off your mortgage or investing matter from a higher perspective?

Objectives – is your What i.e. What is the long term goal that feeds from your current purpose?

Strategy – is the How i.e. How are you going to achieve those objectives or goals.

Tactics – is your How Exactly i.e. what steps you're going to take in order to put your strategy in motion to achieve those set goals.

Here is an example:

Let's say your purpose is to live a good, healthy and fulfilling life without any money worries.

Your objectives might be to become financially independent or to have some financial security.

Now your strategy, and this is where investing in the stock market vs pay off mortgage early come in because they’re levers for achieving a set goal.

They are aspects of a strategy for achieving a particular goal.

The tactics based on what strategy you choose, are then the various things you start to do.

Such things as increasing your savings rate, budgeting, etc.

All those things that we all find a challenge but in some ways must do in order for us to achieve our goals.

So that framework essentially helps us almost set a scene for how we approach answering this question.

Remember, this is about you and making it real in your life.

Let's zoom in now, look at a realistic example of how we apply this.

Consider a couple:

– Aged 38 and 35 years old, married, and with two kids.

– they've got some decent salaries (joint family income of £70k p/a), although 90% of it is typically spent,

– Everyone is currently healthy, although they don’t have health or life insurance,

– They own a home just on the outskirts of London and owe about £200k on their mortgage,

– No debts apart from their mortgage,

– They’re at the stage of Financial Stability (i.e. 3 – 6 months of expenses saved) on the money journey.

These are their current and unique personal circ*mstances. They currently have no long term goals.

Should they be paying off their mortgage or should they be investing through the stock market?

NEW: A video version of this blog post on pay off mortgage early UK vs invest:

How I would look at this would be this –

They've only got 3 – 6 months worth of savings. That’s the emergency fund sorted.

The next logical goal should be to try and get themselves closer to a place of Financial security where they have at least about one year worth of liquid funds available.

Those liquid funds can be available in, say, short term deposit savings accounts.

Or invested through the stock market in the form of say, index funds or ETFs, for example. These could hold a larger allocation to bonds compared to equities.

This will give them elements of liquidity because they've got kids.

Things could happen and they might need those funds for all kinds of things beyond just having emergency.

However, they need some level of security.

Now say that couple had gotten to that stage and now had long term goals of one day becoming Financially Independent.

They could carry on investing through the stock market or at that stage consider a different strategy such as paying off their mortgage.

The extent to which they choose to do this will depend on what their feelings are around what they see the future looking like and what they prioritise in their futures.

Let's add in the element that this couple are now hating their jobs and want to start their own business.

At that stage they would have to rethink what that strategy is that they are pursuing, should they carry on investing through the stock market?

Remember, the stock market only really works for you if you have a long term horizon, depending on what strategy you pursue.

But for this couple, they would have to really ask themselves questions such as –

“Is our current strategy that we were employing of investing through the stock market still working for us?

Or should we gradually pay off our mortgage such that we can start to work part time? Such that one of us could maybe quit our jobs and start to invest in the business.”

My point to you here really about deciding, whether you invest through the stock market or pay off mortgage early is a very personal one.

Really driven by where you are currently on the money journey, i.e. Your current circ*mstances and what your long term objectives are.

Where is it you're going and what strategy do you think is best for you to employ in order to achieve your goals?

Take my personal journey as an example. We actually did both.

In addition to paying off the mortgage, we were also investing through the stock market but employing a passive investing strategy.

We did this where we knew we had a decent level of savings put aside so we had financial security.

Then we considered the future and a big part of what we wanted to do was to run our own thing.

We wanted to pursue passions, start our own side hustles and build them to become proper businesses.

These would then give us the option to do whatever we wanted because we would have complete control of our income and time.

So our strategy was that we saw the mortgage as the low hanging fruit.

The thing that we could get hold of because with this investments through the stock market, you needed at least 10 – 20 years to start to see it really, really work for you.

I.e. For those average return rates (7% – 8%) that everybody talks about, to see those really coming through for you.

But with the mortgage, we thought, you know what? If we really focused on overpayments and various things mentioned in the mortgage free video, we could do this in less than 10 years.

We ended up doing it in 7 years and so the mortgage priority became the better strategy for us based on our personal circ*mstances.

The choice to pay off mortgage early vs Invest has many advantages and disadvantages which I'll cover below.

However, I hope this has given you some perspective into how you might have to think about it because it's not just a clear cut answer of:

“Of Course you should invest through the stock market because that's the logical thing to do.”

No, it's entirely down to your circ*mstances.

Where do you stand and what are your goals?

What are you trying to achieve in your own personal life circ*mstances and how does that then inform what strategy you employ?

Let's now dive in and look at the advantages and disadvantages of pay off mortgage early vs investing through the stock market.

Advantages re Pay Off Mortgage Early

Below are the advantages re pay off mortgage early:

1. Happiness

I don't know anybody who's mortgage free who is not happier as a result, and that includes me! For one, you manage to get years of your life back!

We paid off a 25 year mortgage in 7 years! That’s 18 years of our lives back debt free!! Totally priceless!!!

Being mortgage-free feels good! You experience a sense of freedom and peace.

You enjoy freedom because you just feel like you just got some massive weight away from your life.

For me, for example, as a family man, it's just nice to know I've got my own home no matter what happens with the economy or my job!

I can do all the travelling I want (and we love to travel), but still have a home to come back to.

2. Risk Taking

When you're mortgage free, people don't muck about with you as much.

Or rather, you can afford to finally begin to say what you really think. You can take a bit more risks in your life.

This could include anything from moving from one employment to another if you wanted to.

Or even taking more time off work if you wanted to so you can take a bit more risks.

3. Closer to Financial Independence

Your goal for financial independence is a lot easier to achieve.

Most people's expenses are typically made up I'd say at least 30 to 50% of housing costs.

So if you haven't got housing costs anymore, then your typical regular essential expenses are a lot lower.

And if you go by, say, the 4% rule, even for example, the target you need to hit to become financially independent becomes a lot lower.

See our video on how much money is enough, i.e. How you can work out your financial independence number, etc.

The barrier for becoming F.I. Is a lot lower if you don't have mortgage costs.

Cause all you typically have would be housing related costs such as lighting, heating, the internet and what have you.

4. Pursue Passions

I'm hugely passionate about business, side hustles, and see them as massive levers for helping anyone accelerate this journey or becoming financially independent.

Getting rid of that mortgage gives you the real opportunity to do that because you've got no other excuse.

You're not having to worry about being kicked out of your home. You just go out there and make things happen!

In addition, you have the opportunity to create more wealth because if you're still working, all your income can then go towards other asset classes.

I.e. more liquid asset classes such as investing through the stock market or even investing in a business or property assets if they generate some passive income.

5. Guaranteed Return

In addition to the above advantages, you also get a guaranteed return.

So if your mortgage interest rate was, say, 2.98%, then you get that as a return by overpaying to pay off mortgage early.

Simples! You’d need after tax returns from other asset classes to exceed this for the returns to be better on paper.

Like I said before though, this isn’t just about logic. There are immeasurable returns that you simply cannot capture in numbers.

Disadvantages re Pay Off Mortgage Early

Below are some of the disadvantages re pay off mortgage early:

1. Low Liquidity

I.e. the inability to easily gain access to your locked capital.

Property is notoriously illiquid i.e. not easily convertible to cash nor is it portable.

So although your house might be acting as a form of savings account, unless you plan to downsize one day, it will be hard to access the locked away capital.

2. Wealth Concentration

You would have all your eggs in one basket in a sense… Simply because you've got a great deal of your money invested in your property.

But that's not necessarily true because as mentioned before, my preference would always be to have a decent level of financial stability first.

I.e. have at least 1 – 2 years’worth of expenses saved and then focus a great deal of your disposable income on perhaps overpaying your mortgage.

Especially if you saw that to be a credible strategy for your own personal life circ*mstances.

3. Cost of Capital

Investing in property usually comes at a material cost, with a lot of deposit money required.

This money has an opportunity cost, which can be seen as the cost of capital.

This cost of capital stops being much of an issue if you started generating an income from your house, e.g. via having a lodger tax free.

Overall, there are way more pros than there are cons re the decision to pay off mortgage early.

Advantages of Stock Market Investing

I'm a fan of investing and I talk about investing a lot as an investor myself, but there are important pros and cons.

First, let us look at some of the advantages:

1. Liquidity

Depending on what you invest in, you're more likely to have a lot more liquidity compared to if you invested in property.

There are complex areas of investing that don't have as much liquidity. For example, if you invested in non-listed companies or if you invest in Venture Capital Trusts (VCTs).

However, a passive investing strategy through index funds or ETFs offers a great deal more liquidity.

2. Wealth Growth

Wealth growth potential is a lot higher if you did it via your pension.

In the UK for example, you get top-ups whether you're a basic rate tax payer or higher rate taxpayer.

If you're a higher rate taxpayer, for example, you get 40p for every 80p that you put in.

So if you put £80, for example, you get top up of £20 through the government.

You can then claim another £20 via your tax returns, for example.

The same applies to basic rate taxpayers, but except you only get 20% rather than 40%.

So that means that if you did invest through your pensions, for example, you give yourself leveraging power because you're getting a lot more bang for your buck.

If you’re like thousands of Brits with multiple pensions across various previous employers, consolidating them is a smart move.

PensionBee offer an effortless service and actually do the work of not only helping you combine your old pensions for free, they also offer you options for investing your money cheaply.

Check them out to learn how it works.

Worth mentioning with pensions that you don't get taxed on contributions but on your way out.

When you come to have access to that money, you will pay taxes.

You get 25% tax free and the rest you pay tax on depending on what your tax rate is at that time when you come to withdraw.

3. Tax Efficiency

You can do tax efficient investing through the stock market either through your Individual Savings Account (ISA) or through your pension.

This gives you the potential for significant returns over time.

Average returns of 7% or more (pre-inflation) are probable with a long enough time horizon.

Disadvantages of Stock Market Investing

Now let us look at the disadvantages:

1. No Guarantees

There are no guarantees with investing through the stock market.

Whereas, if you pay off mortgage early, you're mortgage free and your returns are guaranteed.

The strategy you pursue, for example, a passive investing strategy, makes it far more likely that you'll be ahead rather than behind.

2. Access

The liquidity point I mentioned with property earlier, also applies to investing through the stock market if you do it through a pension, for example.

You cannot access your pension investments until the age of 55, which can be both a good and bad thing.

Although you can invest through, say your Stocks and Shares ISA and have a lot more access to your money doing it that way.

You miss out on the huge benefits that come from top-ups from the government and the opportunity for your money to work harder of a long horizon.

In conclusion,

The choice to pay off mortgage early vs investing through the stock market at both forms of investments.

One is through property and the other investing into companies through the stock market.

Both will generate you various forms of returns and the path you choose depends on your personal your day to day circ*mstances and your long term goals.

Both options are not mutually exclusive.

i.e. You don't have to just choose to pay off mortgage early or investing through the stock market only.

You can actually mix and match them.

And that's what we've been able to do on our own personal journey of not just paying off our mortgage, but also continually investing consistently in an automated fashion through the stock market.

I hope this qualitative approach has been helpful in helping you decide whether you should be investing through the stock market or pay off mortgage early or a combination of both.

I'd love to hear from you in the comments below.

What To Read Next>>

• How To Invest In Stocks With Confidence: Step-by-Step For Beginners
• Pension vs ISA: Which Should You Invest In?

What To Watch Next>>

Are you investing through the stock market or working to pay off mortgage early? Or Both? What led to your current approach?

Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.