At the moment I have a bit of spare capital lying around. Now I could overpay my mortgage with this money. Alternatively, I could invest it in the stock market.
So what’s the best option? Let’s discuss.
Mortgage vs investing
When it comes to overpaying a mortgage versus investing, the best option will vary from person to person, because everyone’s financial circumstances are different.
But in my situation, I’m convinced I’m better off investing my money in 2023. Here’s why.
Last year, I was able to lock in a great mortgage rate before interest rates shot up. Believe it or not, I was able to pick up a rate of around 2.7% for five years.
What this essentially means is that for every £1,000 I’ve borrowed, I’m paying around £27 in annual interest for the duration of the loan.
Or put another way, if I paid £1,000 off my mortgage today, I’d save around £27 in interest annually.
The best returns
So the question is – could I get a better return than 2.7% by investing my money?
And to my mind, the answer is yes. Let’s say I invested my money in a well-constructed portfolio of stocks (more on this below).
In this scenario, I could potentially generate a return of around 10% annually. If I was able to achieve a return of 10% per year, I’d have £1,100 for every £1,000 invested after one year.
To my mind, that’s a better result than saving £27 for every £1,000 paid down on my mortgage.
I could even obtain much higher overall returns by investing in a SIPP (Self-Invested Personal Pension) or a Lifetime ISA. If I put £1,000 in a SIPP, I’d get tax relief of £250 (assuming I was a basic-rate taxpayer), taking my total capital to £1,250. Achieve a 10% return on this and I’d have £1,375.
Similarly, if I put the money in a Lifetime ISA, I’d get a bonus of £250. Achieve a 10% return here and I’d have £1,375. These would be great returns.
I’ll point out however, that with both of these investment vehicles, I’d have to lock my money away for the long term.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Investing properly
Of course, to give myself a good chance of achieving a 10% return from stocks, I’d have to invest properly. One or two stocks isn’t going to cut it.
I’d want to own a diversified portfolio of shares that includes technology companies such as Apple and Alphabet (Google), healthcare companies such as AstraZeneca and Smith & Nephew, consumer goods businesses such as Diageo and Unilever, and financial services organisations such as London Stock Exchange Group and Visa.
By diversifying my capital and investing in high-quality businesses like the companies I’ve listed above, I’d give myself a good chance of achieving attractive returns.
It’s worth noting however, that strong returns would still not be guaranteed. In the short term, the stock market can be unpredictable.
Stocks make sense
I’ll point out that if I was paying a much higher level of interest on my mortgage today (eg 5-6%), I may consider overpaying it. In this situation, it could make more sense to reduce my debt levels.
Having said that, I would most likely still invest some money in the stock market. Because, again, I think I could achieve higher returns than that with shares over a period of three to five years.
