It’s a question floating around the online personal finance forums for a couple of years now: “Should I overpay my mortgage?” and the answer seems to be more complicated than it appears.

Historically, the answer has always been a resounding Yes. Mortgage interest rates were over 5% and even a small monthly contribution would knock years off of the mortgage length which saves thousands in interest.

Take a £200k mortgage at 7.5% with a 25 year term. Repayments would be about £1,478 and total to be repaid with interest would be a whooping £443,395.

Now, if you overpaid by 10% each month (£147); total repaid with interest drops to £381,952 and the mortgage is cleared almost 5 1/2 years early.

Overpay by 50% a month (£739) and the total repaid with interest drops to £294,281 and the mortgage is repaid 14 years earlier!

Quite the incentive. However, in recent years interest rates have plummeted here in the UK resulting in mortgages of 4% for first time buyers and as low as 1.5% for those with high equity. Even better; inflation currently hovers around 2-3% making the real value of your mortgage debt shrink over the years.

This is leading some investors to lower mortgage repayments to a minimum and instead invest in stocks or more property in the hope of receiving a higher returns. Historically, the stock market has returned an averaged 7%, beating the current low mortgage interest rates.

Personally; our mortgage rate is at a relatively high 3.99%. While I may be able to beat this rate through investments – Is it worth the risk compared the guaranteed return of mortgage overpayments? Plus the additional benefits of being mortgage free several years earlier? Finally there is the consideration that once we pay off more of the equity, we will be able to remortgage at a lower rate.

While financially it appears better to ignore the mortgage and use all spare funds on investments, I’d rather have the security of the guaranteed returns while aiming to quickly rise equity and remortgage for a lower rate at the end of our current 2-year fix. That’s not to say I’d completely ignore investments; I will continue to passively invest each month in a cheap index tracker fund and thus help to diversify. When the mortgage is cleared (estimated 10 years), I can switch the funds to investments and achieve the 70%+ savings rate.

Do you overpay your mortgage, or take the risk of higher returns on investments? Please leave a comment and let me know.