Last month, however, I decided to stop doing so for three reasons.

Low rates    

First, a bit of context. In the last month, I switched to another fixed deal at a lower rate that I was previously paying. Much my father’s indignation (he grappled with double-digit percentages back in the 1990s), my new rate is a little under 2%. 

The fact that I’m now paying less than half the rate of interest I was before means there’s a bit of cash leftover. “So why not carry on making overpayments“, you might be wondering?

One reason relates to the product itself. Unsurprisingly, there are limits to how much a lender will let you pay off within a certain time frame. Go over this limit and you’ll be penalised. With repayments now less than they would have been had I not tackled the mortgage head-on in the past, this was a potential issue for me. It may be a risk for you too.

A second reason relates to the benefits that come from moving this extra cash into my Self-Invested Personal Pension (SIPP).

As I’ve mentioned before, SIPPs are a very attractive option for most long-term investors. In addition to letting you shield any investment profits from the taxman, having a SIPP means you’ll also receive tax relief from the government on any money you pay in. 

In practice, this means that someone with, say, £100 left in surplus cash every month will get an additional 25% on that amount if they put it in their SIPP, assuming they pay the basic rate tax. So, they’d have £125 rather than £100 to put to work.

My third reason follows on from the second. Right now, the yield generated by a simple exchange-traded fund that tracks the FTSE 100 is higher than the interest being charged on my mortgage debt (although, clearly, rates might rise in the future). As such, I stand a chance of generating more wealth over the long term by investing the spare cash, reinvesting the income I receive in my SIPP and allowing compounding to work its magic. 

A word of caution

Whether someone should switch from overpaying their mortgage to putting any surplus cash to work in the market will clearly depend on their circumstances. The latter option is far riskier.

Shares might plunge tomorrow and, in doing so, reduce the value of any money not used for the mortgage. Contrast this with the comfort felt from knowing you’re tackling your biggest debt faster than originally intended, thus potentially saving you thousands of pounds in the process.

There are ways of mitigating this risk. Buying liquid, diversified funds (such as that mentioned) rather than individual company stocks should temper some of the volatility. A commitment to investing for decades rather than a few months or years should also make it easier to deal with things on an emotional level.

Ultimately, both overpaying and investing are good ideas but the best option for someone will always be that which allows them to sleep at night. 

The post 3 reasons to not overpay a mortgage appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Ultimately, the answer to the question is that it depends on a few different factors. Here, I’ll explain what you need to consider if you’re thinking about either overpaying your mortgage or investing your money.

Check your mortgage

The first thing to consider is whether your mortgage provider will allow you to make extra payments on your mortgage without penalty. Generally speaking, most mortgage providers allow you to pay off an extra 10% of your mortgage balance if you’re in the introductory period and then pay off whatever you want after that.

Yet this is not always the case – some lenders will penalise you for making overpayments in the introductory period. So it’s important to check the terms and conditions of your mortgage first. You don’t want to be hit with large fees for overpaying.

Check your interest rate 

Assuming you can make extra payments penalty-free, the next thing to consider is your mortgage interest rate. And more specifically, how that rate compares to the returns you could potentially earn from investing.

Once upon a time, when mortgage rates were high (they were above 15% in the late 1980s), overpaying your mortgage was generally a no-brainer. It made sense to reduce your debt as quickly as possible.

These days, however, it’s a very different story. Today, mortgage interest rates can be under 2%, meaning that borrowing money is very cheap. If you have a mortgage at a rate of 2% and you pay off an extra £1,000, you’re only going to save £20 in interest for the year.

So the question you need to ask yourself is – could you get a better return on your money (i.e. higher than the mortgage interest rate) by investing it?

Higher returns from investing

Personally, I think you can earn a better return on your money by investing it, assuming you’re willing to invest for the long term. Just look at the returns from the stock market over the last five years. For the five-year period to the end of January, the FTSE 100 index generated an annualised return of 5.8%, while the FTSE 250 delivered an annualised return of 8.3%. Looking internationally, the S&P 500 returned 12.4% per year. Meanwhile, the Lindsell Train Global Equity fund returned about 18.4% per year over the five-year period.

If you took that £1,000 I mentioned above and generated a return of 10% for the year through the stock market, your return would be £100 – a better result than saving £20 by overpaying the mortgage.

I’ll also point out that if you put the extra money into a pension, you’d receive tax relief (£1,000 is topped up to £1,250 for basic-rate taxpayers). Similarly, if you put the £1,000 into a Lifetime ISA, you’d receive a 25% top-up. These kinds of top-ups could boost your excess capital even further.

Of course, it’s worth remembering that mortgage interest rates could rise in the future. And stock market returns could potentially disappoint. However overall, I think there’s certainly a case for investing your money instead of paying off your mortgage in today’s low-interest-rate environment.

The post Should I pay off my mortgage or invest the money instead? appeared first on The Twelfth Magpie.

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Edward Sheldon has a position in the Lindsell Train Global Equity fund. Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Although your ability to take the following steps will depend on just how much money you’ve been handed, I think there are a few actions that most of us should consider.

1. Pay off debts

Rather than squander the cash on shiny new things, I’d start by addressing any lingering debts. These could be in the form of a personal loan or anything on a credit card.

The latter should definitely be considered a priority since rates of interest charged by card issuers are usually high (an APR of around 20% is the norm). This means that those only making the minimum payments each month could be paying back a huge amount of money over the long term, even if what they originally purchased wasn’t all that expensive.

Tackling your debts first might sound dull but it’s good for both your financial and personal health. 

2. Pay off your mortgage

Having cut the high-interest debt, your next option might be to wipe out your mortgage (assuming you have one). Whether this is a good idea or not will be based on your circumstances and for how long you think interest rates are likely to remain at historic lows.

Another thing worth considering is whether your lender will charge for paying off your mortgage entirely. In such a situation, it may be best to overpay a little every month and reduce the amount of interest you’re charged over the term instead.

If in doubt, consult a financial adviser. 

3. Save a little

Here at the Fool, we think people tend to focus too much on saving (if they save at all) and too little on actually making their money work for them. The former might help you sleep at night but with inflation gradually eroding the value of your cash the longer it sits in your account, that’s a heavy price to pay.  

There is, however, a caveat to this. Having a little money to fall back on in times of trouble is perfectly sensible and should help cushion the blow from, say, a temporary period of unemployment. Having opened the savings account with the best interest rate you can find, the only question you need to answer is how much is enough.

4. Invest a lot

Here’s where things get interesting. Yes, it’s time to hit the stock market, especially if you’ve got no need for the money for at least five years.

The market may have a reputation for being a scary place but don’t let that put you off. One relatively low-risk option is to invest the majority of your lump sum into cheap exchange-traded funds that simply track the market return rather than trying to beat it. Many also pay dividends that can then be re-invested (recommended) or spent. 

Importantly, try to hold as many investments as you can in a Stocks and Shares ISA or a Self-Invested Personal Pension. When combined, these accounts allow you to deposit up to £60,000 in a single tax year. And if you’ve received anything over this amount, think about transferring some of your new-found wealth into similar accounts for your partner, children, or other family members.

The post Your 4-step plan for what to do with an inheritance appeared first on The Twelfth Magpie.

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• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Was the best investment I ever made a high-interest bond with a multi-year lock-in clause? No, but I have done a few of those.

Did I invest in fine wine, art, or antiques, perhaps? No. Those areas are beyond my circle of competence.

An old-fashioned idea

The best investment I ever made for sheer life enhancing benefit and feel-good effect was one I completed around 11 years ago — I paid off my mortgage.

Well-accepted investing advice is that it is a good idea to pay down any debts we might be carrying before putting money into other investments, such as shares on the stock market. There is much less agreement on whether those debts should include the mortgage carried on our homes.

I took an old-fashioned approach to the problem and viewed personal debt — all personal debt — as undesirable. Investing my money into paying down my debts, and therefore stopping an outflow of interest at whatever percent, was as good as investing my money and earning whatever percent, I reasoned.

Investing bliss

I found that reducing my spending, debts and outgoings was even better than earning more because I then had the choice of not working so much. Perhaps that benefit is often overlooked by folks when doing their financial planning.

In a mortgage-free and rent-free world, I find the bucks I earn have much more bang than they used to. My personal fixed-cost base is set very low, so my monthly earnings quickly build to ‘profit’.

‘Not working so much’ is one salubrious possibility when we go mortgage-free. We can then hang onto that feel-good lifestyle by living below our means. That is something that becomes easier to do in a mortgage-free world, because our means are greater than they used be when saddled with hefty mortgage repayments.

Targeting mortgage freedom

I consider paying off my mortgage the best investment I ever made and it is an investment that pays ongoing life-style dividends. You can probably do it, too.

For those that own their own home, I would argue that investing regularly on paying down mortgage debt is the best work/life investment available.

One way of achieving a mortgage-free lifestyle could be to:

1) live below your means so that there is money left over at the end of every month.

2) use the leftover money to pay off any non-mortgage debt, thus further reducing outgoings,

3) when you have cleared all other debts, start paying more money than you must, to pay down your mortgage.

It might be worth talking to your mortgage provider before proceeding with accelerated mortgage repayments to make sure that there are no built-in early repayment penalties in your mortgage contract. If there are not, what are you waiting for? If there are onerous clauses, it might be time to renegotiate terms with your mortgage provider or switch to another.

The post The Best Investment I Ever Made — And You Can, Too! appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?