Do you want to invest or overpay your mortgage?

If they are lucky enough to have extra money, homeowners may be considering whether to invest it or use it to pay off their mortgage

Which one might be most effective for you is explained.

The monthly mortgage repayments for millions of households who are remortgaging this year will increase, even though the Bank of England (BoE) has been lowering interest rates for more than a year, and they are currently at 4 percent.

Although they have been declining as inflation has decreased, mortgage rates are still higher than they were in previous years.

Many home loan borrowers who are nearing the end of a fixed-rate deal must remortgage onto deals at a higher rate, which means higher monthly repayments, after years of paying interest on their loans that was less than 2 percent.

Those who have extra money might be wondering if it's better to pay off their mortgage in full in order to lower the debt more quickly and improve their chances of remortgaging.

However, they might question whether investing the funds would yield a respectable return.

We compare the two choices to see which one might be best for you.

Advantages of making larger mortgage payments.

By paying off your mortgage in full, you can lower your interest costs and pay off your debt more quickly.

For instance, at a 3 percent interest rate, a borrower who took out a £250,000 loan over 25 years would pay £1,186 per month.

You would save £22,812 in interest and shorten your mortgage term by five years if you made an extra £200 per month.

If you overpay by £200 per month on a mortgage of £250,000 with a 5 percent interest rate, you would save £44,427 in interest and shorten the mortgage term by six years. Assuming your mortgage rate stays constant, that is.

Therefore, overpaying when your mortgage rate is higher can have a greater effect; you can drop the interest rate significantly and pay off your mortgage more quickly.

Check out our mortgage overpayment calculator to see how much you could save depending on your circumstances.

Making overpayments on your mortgage could also be advantageous if you decide to remortgage. A wider variety of better rates might become available if the mortgage's loan-to-value (LTV) is decreased. Additionally, a smaller mortgage should make it simpler to meet the affordability requirements, which could lead to a wider range of interest rates.

Rob Morgan, chief investment analyst at wealth manager Charles Stanley, says: "Paying off your debt sooner will undoubtedly save you thousands of pounds in interest. You pay more interest on your mortgage the longer you have it and the higher the interest rate. This is particularly true in the beginning, when you have a larger loan balance and are paying significantly more interest than capital.

Considerations to make before you pay too much for your mortgage.

Most people agree that paying your mortgage in full is wise financial management. But first, a few things need to be taken into account.

Before they think about investing or overpaying a mortgage, households should have a healthy cash buffer of at least three to six months' worth of expenses, according to Evangelos Assimakos, investment director at Rathbone Investment Management.

For any unforeseen financial needs, like a boiler breakdown or an unexpected increase in your energy bill, this buffer should be kept in an easy-access savings account.

"If you have extra money over three to six months' worth of expenses, pay off your highest-interest debts (loans, credit cards, and overdrafts) first. You should only think about paying off your mortgage if you have no other debt, according to Assimakos.

Attempt to pay off credit cards and loans before mortgages because they are frequently more costly.

There are two additional things to consider if you feel that paying off your mortgage in full is the best use of your extra funds. First, see if there are any penalties for overpayment. The majority of lenders permit borrowers to make annual overpayments of up to 10% of their outstanding debt. You might face severe penalties if you go over this.

Second, confirm that you're lowering the mortgage term rather than the amount of future payments. You will pay less interest and pay off your mortgage more quickly if you do this.

Is it better to invest than to make excessive mortgage payments?

Morgan claims that there is an "opportunity cost" associated with past-due mortgage payments. He clarifies: "That is, could you have earned a return greater than the interest on the debt if you had invested the money?

"Investing in well-run, expanding businesses over many years has, at least historically, been a dependable method of accumulating wealth. But you must keep your money invested for a long time if you want to take full advantage of the stock market's power and compound returns.

This would have been a better course of action than overpaying a mortgage with a lower rate, say 3 percent, if you had invested instead and your portfolio had returned 5 percent.

There may be less of an opportunity cost, though, because mortgage rates are currently around 5%.

Improving a 2 percent or 3 percent rate with investment returns is one thing, but steadily reaching upwards of 6 percent is far more challenging. It makes more sense to pay off debt as soon as possible when interest rates are higher, according to Morgan.

In addition to comparing the numbers, it's critical to consider your level of risk tolerance.

The important thing to keep in mind, according to Assimakos, is that investing is a longer-term endeavor. You should be able to leave your money invested for at least three to five years, and you should also be willing to accept the possibility of losing money due to the unpredictability of markets.

Conversely, if your investment strategy is sound, compounding returns and investing as much extra money as you can over an extended period of time can be a very powerful force.

Is it wise to make an investment now?

When you want to invest, you might be unsure if it's safe to place your money in the markets.

Since there is never truly a perfect time to invest, it is best to keep in mind the saying that it is more important to spend time in the market than to time the market.

Without a doubt, investing entails taking on the possibility of financial loss. However, since you're investing for the long term and will have time to recover any losses, you shouldn't be too concerned about market swings if you know you can keep your money invested for at least five years.

Alice Haine, a personal finance analyst at Bestinvest, an investment platform and coaching service, says that the key to weathering any downturns is always time in the markets rather than timing the markets.

When you are ready, you can begin investing if you are positive it is the best course of action.

How can I determine if investing is better for me than overpaying?

Your situation, stage of life, and time horizon will ultimately determine whether you choose to invest or overpay for a mortgage.

One could argue that, for instance, a person who is about to retire and still has a mortgage should prioritize paying off their home loan in order to free up funds for other living expenses. Someone in their twenties might wish to invest their extra money in order to profit from market opportunities.

"If household cash-flow is tight, those with spare cash and a mortgage that is about to expire can direct their money towards overpayments rather than topping up investments," Haine adds.

Since overpaying preserves the loan-to-value ratio, which can dictate access to more favorable mortgage rates, this will become even more crucial as real estate values fall.

Experts concur that investing and overpaying your mortgage could be the best course of action, depending on how much extra money you have available.

If you plan to remortgage soon, the former will enable you to avoid higher repayments and will strengthen your financial stability as you pay off debt. In the meantime, investing can help you increase your wealth and beat inflation.

Remember that you cannot get your money back once you have overpaid your mortgage. Even though you should ideally leave it invested, if you do invest it, it will be there in case you need to access money.

Other options for homeowners are examined in our "what is an offset mortgage" article.