Mortgage Overpayment vs Investing vs Pension Calculator

Check out our guides for more money help

Investing

A Simple Guide to Starting Your Investment Journey

Find out if investing could be right for you, and how to start choosing suitable investments.

Investing

What Investments to Choose as a Beginner

Investing doesn’t have to be complicated. Find out how to manage risk while still aiming for great returns.

Why would I invest rather than save my money in cash?

Saving your money in a cash account is a great way to benefit from interest rates while taking on no risk.

But if you are planning to save over the long term (think five years or longer), you could see bigger returns from investing your money. The stock market has historically outperformed cash savings over the longer term.

If you saved £5 a month into a regular savings account paying an average of 2% interest, you would save up £2,456 over 30 years.

But if you put this into the stock market – which has historically returned an average of 5% – via a stocks and shares ISA, you would have £4,077. That’s over £1,600 more than you’d get from a cash account.

Why would you overpay your mortgage?

When you take out a mortgage, you agree to pay interest to the bank on top of your loan repayments. You then agree to pay a fixed amount each month – some of this pays off your loan, and the rest is interest.

Over the course of your mortgage term, this can result in you paying hundreds of thousands of pounds in interest. The amount you will repay in interest depends on your mortgage rate, with a higher rate costing you thousands of pounds extra long-term.

For example, with an interest rate of 2%, borrowers with a £200,000 mortgage spread over 25 years would repay £54,357 in interest over the term. But with an interest rate of 5%, you would pay a whopping £150,882 on a £200,000 mortgage over 25-years.

By overpaying your mortgage, you reduce the overall size of your loan more quickly, meaning you end up paying less interest long-term.

How much can you save long-term by overpaying?

It can be hard to see the benefit of overpaying your mortgage long-term at the time. But let us break it down for you, and you’ll see that you could save yourself tens of thousands of pounds.

Let’s assume you have a £200,000 mortgage at an interest rate of 5%, to be repaid over 25 years (your rate will likely fluctuate over the course of your term, but for simplicity’s sake).

If you overpaid your mortgage by £50 a month, you would save yourself £13,415 in interest. It would also mean you would pay your mortgage off almost two years early.

If you upped your overpayments to £200 a month, you would save £41,843 in interest, cutting just over six years off your mortgage term.

Learn more about your pension

A Simple Guide to Choosing a Personal Pension

Pensions

A Simple Guide to Choosing a Personal Pension

Find out what you need to know about personal pensions, and which options could give you the best possible retirement fund.

Pensions

A Simple Guide to Self Invested Personal Pensions

Learn what we mean by a SIPP, and whether it could benefit you.

What are the benefits of saving into a pension?

Paying into a pension is another financial decision that you won’t see the benefit of immediately – but your future self will thank you!

There are a number of benefits to putting your money into a pension rather than putting into a regular savings account or another investment.

The top benefits are:

Anything earned on pension savings is tax-free

The government tops up pension contributions by 25% (known as pensions tax relief), which is effectively free cash

If you are employed and save into a workplace pension, your employer will also contribute to your pension – more free cash!

Let us demonstrate how saving into a pension can generate a lot of free cash towards your retirement.

If you saved £50 a month into your pension, growing at 5% a year (after charges), you would save up £76,301 over 40 years – but you would only have contributed £24,000 of your own money.

Meanwhile, if you increased your payments by 2.5% per year, you would save a total of £109,671, while only saving £40,000 of your own money.

Compare your pension against the best performing

Pension Performance Checker

Check how your pension fund is performing, and whether you could gain higher returns elsewhere.

Pensions

Pension Calculator

Use our calculator to work out your likely monthly income during retirement – and the total value of your pension pot

How do I know which option is right for me?

The main thing to consider when deciding whether to overpay your mortgage, save into a pension or invest, is what your ultimate goal is, and what the unique circumstances of your situation are.

For example, if you have a very high interest rate on your mortgage, it may make more sense for you to try to bring your mortgage down, as the interest you will save long-term could be greater than anything you could save up.

But if you have a lower mortgage and want to save up for retirement, putting money into a pension could benefit you. For anyone with more immediate goals than retirement – but still over five years away – investing may make more sense.

Use our calculator to find out which makes the most sense for you.

What to do with a lump sum amount?