My mortgage is up for renewal: Should I pay it off or make investments as a substitute?

I’m due to remortgage later this year. At the moment my mortgage rate is 1.81 per cent, and I’m unlikely to get anything below 4.5 per cent unless rates suddenly drop. 

This will see my monthly payments go from £762 a month to £918 a month.

However, I just received around £100,000 as an inheritance. If I combined this with money I have in savings I could pay off my mortgage when the current deal ends.

Most people I know think this is what I should do with the money. But am I being too defensive, and should I consider investing it elsewhere for potentially better returns?

I have no intention of moving home for the foreseeable future. And while the higher mortgage payments will pinch, I will be able to cope with them. If my time horizon is at least five years, shouldn’t I invest in the hope of growing my wealth? And if so, where and how?

Ed Magnus of This is Money replies: This is a great question and it will no doubt strike a chord with lots of people remortgaging this year. 

While they won’t all have £100,000 to play with, those with a bit of extra money from an inheritance or savings might well consider paying it off their home to reduce their monthly mortgage bill. 

Roughly 1.6 million people will roll off fixed rate mortgage deals over the course of this year, and a similar number face the same fate in 2025.

Many will be coming off rates of 2 per cent or less and now face rates of two or three times what they have become accustomed to, perhaps equating to hundreds of pounds per month. 

It’s often suggested that paying off your home loan should be the number one financial priority. For many, becoming mortgage-free is a major milestone.

But you are also sensible to question whether paying off the mortgage will leave you better off in the long run.

Will investment returns exceed money saved on a mortgage in 2024?

When interest rates were low, there was a good chance that investing over a five-year period would have earned you more than you would have saved by paying off the mortgage early.

For example, someone who invested in a global tracker fund such as Fidelity index world or the Legal and General global equity fund, which both seek to match the performance of the MSCI World Index, would be up roughly 80 per cent over the last five years. A £100,000 investment would have grown to £180,000. 

Meanwhile, someone with a £100,000 mortgage on a 2 per cent rate being repaid over 20 years would have paid out a total of £30,360 during that time when factoring in all the interest on top, reducing the mortgage to £79,000.

But with interest rates far higher at the moment, it’s much less likely that five years of investing will trump paying off the mortgage early.

And while many investors will have enjoyed strong returns over the past five years, there are plenty who won’t have been so lucky. Of course, past performance is no guarantee of future returns either.

You say your £100,000 inheritance is stored in easy-access savings. This is a great holding strategy while you are figuring out what to do next.

At the moment, the best easy-access savings rates are around 5 per cent.

Although these rates are likely to change over the coming months, a 5 per cent rate could return £5,000 over the course of a year – if it remained the same.

That’s a good return, but it’s worth remembering that you’ll need to pay income tax on the interest earned.

If you’re a higher-rate taxpayer you’ll get the first £500 tax free and then be taxed at 40 per cent on the remainder and if you’re a basic rate taxpayer you get the first £1,000 of interest tax free and then are taxed at 20 per cent on the remainder.

That means your return after tax will be quite a lot less than 5 per cent.

The reason for mentioning this is to highlight that tax on income you make from savings or investing always has the potential to eat into your overall returns.

If you decide to go down the investing route, then it’s worth bearing this in mind. 

If you choose to invest via a tax-free stocks and shares Isa, you can only put in £20,000 each year. 

That means the remaining £80,000 will need to be put in a standard investing account, unless you are prepared to stagger the payments into your Isa over the next five years. 

The other option is to invest into your pension, but you then won’t be able to access the funds until you are 55 (rising to 57 from 2028) and you can still end up getting taxed depending on how much you are taking out.

Gains and income made from stocks and shares held outside of an Isa or pension can take a significant tax hit – particularly when you cash in.

Income earned via dividends will face a 8.75 per cent tax rate if you’re a basic rate taxpayer or a 33.75 per cent rate if you’re a higher rate taxpayer, though you do have a £500 tax-free dividend allowance each year.

Then, when you come to sell any of your investments, you’ll face capital gains tax. This is charged at 10 per cent for basic rate taxpayers and 20 per cent for higher rate taxpayers, on anything above the £3,000 annual tax free allowance.

Were you to invest in another property such as a buy-to-let, you’d also face income tax on the rent and capital gains tax at 24 per cent when you come to sell. 

For further expert advice, we spoke to Brian Byrnes, head of personal finance at saving and investing app Moneybox, and Rob Dix, co-founder of property advice website Property Hub and co-host of The Property Podcast.

Should he invest or pay off the mortgage?

Rob Dix replies: People generally recommend paying off your mortgage because it puts you in the position of maximum safety. With no debt, you’ll always have somewhere to live even if life takes an unexpected turn. 

But that doesn’t mean that maximum safety is the right option for everyone. It  depends on your risk appetite, stage of life, and overall financial situation.

There’s a known upside to paying off your mortgage early, which is that you cut down the interest you would have paid had you continued until the end of the mortgage term.

However, you could potentially make returns that exceed that interest saving by using the money to invest in something else. 

If that other investment generated a return higher than the cost of the mortgage, whether from income, or growing in value, or both, you’ll come out ahead – and will still benefit from any increase in the value of your own home.

As for what to invest in, that’s a big question – and if you don’t have any ideas or knowledge in that direction, I’d recommend spending as long as necessary thoroughly researching all your options and building your knowledge before doing anything. 

While the upside of investing rather than repaying may be higher, so is the downside.

What impact will interest rates have? 

Brian Byrnes replies: This situation will be familiar to many with interest rates having risen rapidly in recent years. 

However, the question of paying down debt versus investing has been a long-standing personal finance question, and although we can run some calculations, the answer will ultimately be based on your personal preference and financial goals.

We can be certain of the ‘return’ you would get if you paid off your mortgage, as this is the interest rate you avoid paying on the debt going forwards, which would be approximately 4.5 per cent for you, for the next five years. 

You also have the additional advantage of having paid off your mortgage and owning your home outright which is the primary financial goal for many people.

So while the return on one side of the equation here is known, the return from investing is less certain, especially in the short term. 

Over the previous decade when interest rates were low, it was reasonable to expect you could earn more from investing than from paying down debt. 

In your case, you were paying 1.8 per cent and given investment markets performed well, a typical balanced investment strategy to return more than this over the course of the mortgage term.

The situation has changed now, though. With balanced investment strategies typically returning between 4 per cent and 6 per cent on average over the long term versus your potential mortgage rate of 4.5 per cent, it does come down ultimately to your personal preference.

There is also the classic caveat that past performance does not guarantee future returns.

What I have always said to clients in this circumstance is that both are good financial options. 

You either pay off your mortgage and become debt-free, or you invest the funds for your financial future and retain the option of paying off your mortgage later on. 

What about doing both?  

Brian Byrnes replies: It’s important to note as well, that it does not have to be a binary question. 

You could pay down half the mortgage and invest half the funds if you are unsure about going 100 per cent in either direction. 

Rob Dix adds: Of course, there are different ‘middle ground’ options too – such as paying off just some of your mortgage, especially if that moves you into a loan-to-value bracket that gives you better options at lower rates.