Got some extra cash burning a hole in your budget?
You could overpay the mortgage. That’s the “sensible” move, right?
But in 2025, with interest rates still elevated and investment returns quietly making a comeback, throwing every spare pound at your loan might not be the smartest use of your money.
Let’s unpack why overpaying feels like the right thing, why it could cost you more than you realise, and how to decide what’s truly right for your financial goals.
Why Overpaying Feels Like the ‘Safe’ Choice
Paying down your mortgage early offers a kind of emotional clarity. Less debt. Fewer monthly commitments. A shorter term. Who doesn’t love the sound of that?
You also don’t have to worry about market swings or risk tolerance. Every overpayment reduces your loan balance and trims future interest charges. And with average mortgage rates hovering around 4-5%, that’s not insignificant.
It feels like progress, because it is. But financial planning isn’t just about that short-term dopamine hit. It’s about making your money do the most it can for you in the long run.
And that’s where things get interesting.
Why It Might Cost You in Growth
Let’s say you have £300 extra per month. Overpaying your mortgage with it at 4.5% interest gives you a guaranteed return, effectively “earning” 4.5% by reducing future interest charges.
But, get this, what if you invested that £300 instead?
Over 10 years, invested in a well-diversified ISA (the allowance remains £20,000 for 2025/26) or pension portfolio targeting 6-7% annual returns (after charges), your extra cash could grow significantly more, especially if you’re using tax wrappers.
In a basic-rate pension, that £300 could be topped up to £375 through tax relief before it’s even invested.
Now that’s growth.
And unlike mortgage overpayments, investments can compound on themselves, accelerating gains over time.
Add in the flexibility: money in an ISA can be accessed if life throws a curveball. Pension contributions will rise from 55 to 57 on 6 April 2028, and benefit from generous tax advantages.
The question becomes: do you want to own more of your house sooner, or build more liquid wealth that might outperform the interest you’re saving?
When Overpaying Is Still a Solid Move
Let’s not pretend overpayments are a mistake for everyone.
If you’re five years from retirement and want the peace of mind of being mortgage-free, the simplicity of clearing that debt can be worth more than a few percentage points of potential gain.
Or maybe you’ve already maxed your ISA and pension allowances for the year, and you’re not comfortable taking on more investment risk. In that case, overpayments offer a guaranteed, tax-free return.
And if your mortgage rate is particularly high, or you’re on a tracker and can’t lock in a better deal, overpayments can offer reliable savings in a rising-rate environment.
For many homeowners, it’s also just a psychological win: “I owe less today than I did yesterday.” That counts for something.
Your Goals Matter More Than the Maths
The real trap here isn’t overpaying. It’s assuming that overpaying is always the best use of spare money.
What are you trying to achieve?
Do you value security and debt freedom?
Or long-term growth and financial flexibility?
If you’re younger, earning well, and haven’t filled your ISA or pension allowance, there’s a strong case for putting money to work in investments, particularly if you have decades for it to grow.
If you’re later in your mortgage term, risk-averse, or aiming to reduce monthly outgoings for retirement, the emotional and financial case for overpaying becomes more compelling.
There’s no universal answer. But there is a personal one, based on your timeline, tax position, attitude to risk, and what really matters to you.
Let’s Make the Right Move for You
Mortgage overpayments aren’t wrong. But they’re not always right either, especially in a financial climate like 2025, where every pound has a job to do.
Before you redirect your next spare £250 into your mortgage, ask yourself: could that money work harder somewhere else?
At Cedar House Financial, we help clients understand this trade-off clearly, objectively, and in the context of their wider financial plan. Whether you’re building wealth, prepping for retirement, or trying to balance it all, we’ll show you exactly where your money adds the most value.
📞 Call 020 8366 4400
📧 Or email enquiries@cedarhfs.co.uk for your personalised mortgage vs. investment review.