If you’ve recently received a lump sum of money, such as an inheritance or redundancy, you may be wondering how best to use it. One option could be to settle your mortgage, as doing so may provide financial peace of mind and a higher disposable income as you’ll no longer need to service your monthly repayments.
Additionally, paying off all or some of the loan might provide you with the financial freedom to retire early or to turn a passion into a new career. That said, using your lump sum to clear your mortgage may not be your only option, as another might be to invest it.
Doing this could expose your money to greater long-term growth potential, which may help to boost your wealth and provide greater financial security later in life. As both options provide potential benefits, knowing which one to opt for can become tricky.
With this in mind, if you’re wondering which might be best for you, read on to discover the pros and cons of each.
Paying your mortgage off could save you significant amounts of money
Clearing debt is typically a higher priority than investing when it comes to financial planning. Settling your mortgage as quickly as possible will reduce the total cost of your loan as it could save you significant amounts in interest.
If you’re unable to clear all of the outstanding amount, you may want to pay a substantial lump sum off it instead, as this may allow you to get a better deal if you later want to re-mortgage. While paying down or settling your loan can make a lot of sense, there are important points you need to consider. These include:
- do you have more pressing debts, such as outstanding amounts on a credit card. As these typically charge higher interest rates, you might need to pay these off first
- does your mortgage provider have an early repayment charge? If it does, paying a significant amount off your mortgage, or settling it, may not be as financially beneficial as you might think
- have you got an adequate emergency fund? Having a rainy-day fund helps you to deal with life’s unexpected events without needing to rely on expensive credit cards or loans. Normally, it’s recommended that you have between three to six months’ worth of monthly expenditure in the fund, which should be kept in an easily accessible cash account. Depending on your circumstances though, you may need more in it.
Another consideration is whether the potential return from investing could be higher than the interest you’d be saving by clearing your mortgage. For example, if you’re paying 3% in interest and the potential return from investing is 4%, the latter might be something you want to consider.
Investing could help to boost your wealth over the long term
Historically, the stock exchange has tended to provide greater growth potential than cash savings over the long term. To demonstrate this, you might want to consider the following graph, which tracks the performance of a medium risk 60:40 multi-asset investment portfolio between 1 January 2005 and 31 January 2025.
Data sourced from Morningstar by AFH Wealth Management. The 60:40 portfolio allocates 60% to MSCI All Country World Index (ACWI) and 40% to Bloomberg Global Aggregate.
As you can see, the investment portfolio provided significant returns over the long-term, despite downturns along the way. While this might tempt you to invest your lump sum, care needs to be taken.
One of the most important aspects of investing is the level of risk you’re prepared to expose your money to. This is because an investment’s long-term growth potential typically comes from assets that are more likely to suffer short-term losses, such as Stocks and Shares.
When your mortgage interest rate is higher, the level of growth your investments will need to achieve to make it worthwhile will need to be higher still. As a result, your money could be exposed to a greater risk of losses in order to increase its overall growth potential, which may not be right for you or your circumstances.
The fallout from Trump’s tariffs may mean investing is something you want to consider
While mortgages have been more expensive in the last three years, the Bank of England (BoE) recently cut its interest rate in an attempt to boost the UK’s economy. Furthermore, an article by the BBC in April 2025 suggests that the bank may reduce rates further than thought at the start of the year, as a result of the economic volatility created by Donald Trump’s tariffs.
It explains that when the BoE dropped its base rate to 4.5% in March 2025, most analysts believed the bank would reduce the rate twice in 2025. Just a few weeks later however, many experts anticipated four cuts would be made during 2025, which could result in interest rates dropping to 3.5%.
If this does happen and mortgage interest rates fall, you may be able to place your money into a less risky investment and still achieve a level of growth potential that makes it a shrewder financial strategy than clearing your mortgage.
Speaking to a financial adviser can help
While we hope this blog provides you with useful food for thought, it should not be taken as financial advice. Whether you should invest or settle your mortgage is dependent on your circumstances, which is why you should always speak to a financial adviser before deciding.
They can help you to understand your options, which is likely to be best for you and why. As a result, you’ll be better placed to make a decision you’ll thank yourself for later on. Please remember that investing carries risk and past performance of the stock market is no guarantee of future performance. As such, you may get back less than your original investment.
Get in touch
If you would like to discuss whether investing might be right for you, please call us on 0333 010 0008 to arrange no obligation initial meeting with one of our independent financial advisers.
Friday 2 May 2025