We have all watched the Bank of England base rate obsessively for the last couple of years. Now that things are settling, I constantly get asked the same question: 'Should I throw my extra cash at the mortgage, or put it in my ISA?'
Mathematically, the answer is usually to invest. If your mortgage is locked in at 4.5% and you realistically expect a global equity index fund to return 7% on average over the next decade, investing makes you wealthier on paper.
But humans are not spreadsheets.
In institutional finance, we look at 'the spread'—the difference between the cost of debt and the expected return on invested capital. With the Bank of England holding rates relatively high compared to the 2010s, the spread has narrowed. A guaranteed 4.5% tax-free return (by paying down a mortgage) is highly attractive compared to the volatile potential of the stock market.
However, over a 15 to 20-year horizon, global equities have historically outperformed mortgage interest rates significantly. If you pour all your liquidity into your property, you become 'house rich and cash poor', which severely restricts your options if you want to change careers.
There is a massive psychological benefit to being debt-free. Paying down your mortgage reduces your required monthly outgoings. This buys you flexibility. If you want to take a career break, start a business, or just work four days a week, having a tiny mortgage payment makes those dreams viable.
My advice? Do both. Use your Spending Plan to allocate a portion of your 'Future Self' money to overpaying the mortgage, and another portion to feeding your Stocks and Shares ISA. You get the mathematical growth of the market, paired with the psychological safety of watching your debt shrink. Learn more about allocating your cashflow effectively in our Spending Plan guide.
Apply this strategy to your own finances using our interactive tool below.
Enter your numbers to reveal the lifestyle creep silently eroding your high income.
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