Paying Off Debt vs Investing

If you have a lump sum or a regular amount to invest, you may be wondering about the best use of the money. Should you take the safe option and clear your debts? Or would it be possible to make a profit through investing?

The answer isn’t straightforward and depends on the type of debt you have, your goals and priorities and your attitude to risk.

We have created this guide to help you weigh up the options.

Debts in Order of Priority

Not all debts are equal. Some are toxic and should be avoided if possible. Others are necessary and can help you achieve important life goals.

When repaying debt, you should prioritise as follows:

1. Payday loans or other expensive short-term debts

2. Credit cards charging the full interest rate

3. Loans which are secured on your property in addition to your mortgage

4. Personal loans

5. Car finance

6. Low-rate or interest-free borrowings such as 0% interest credit cards (although always make sure these are cleared within the promotional period).

7. Mortgages

So if your only debt is a mortgage, investing to repay the capital is a possible option.

Interest rates have been falling in 2025, and if you are currently paying a higher rate, you may be able to move to a better deal.

Mortgages are the only debt with a long enough timescale to potentially benefit from investment growth. Any other debts should be cleared first.

Investment Options

Similarly, there are multiple investment options available depending on what you would like to achieve. These can also be prioritised, for example:

1. Building an emergency fund so that you can deal with the unexpected.

2. Paying into a pension to ensure you have a comfortable retirement.

3. Saving and investing towards your other important goals.

4. Tax-efficient investing.

5. Surplus investing for growth, but no fixed purpose.

6. Speculative investing or share trading.

Creating an emergency fund is a higher priority than clearing most debts, except in cases of extremely high-interest debt. This can provide a safety reserve to ensure that you can avoid increasing your debt in the future.

At the other end of the scale, speculative investing should only be considered if you have no significant or expensive debts and your main goals are fully funded.

Deciding which options fall between these two extremes will depend on your goals and your circumstances.

Clearing Debt

Making progress towards a debt-free status is highly satisfying. There are multiple websites and forums dedicated to this subject, which makes it easy to find support from like-minded people.

There are also a number of tangible benefits:

Your outgoings will reduce.

Your credit rating could improve.

You will be less financially vulnerable if your circumstances change.

Your surplus income can be saved or invested towards your goals.

If you repay debt early, you will save on interest.

Regular overpayments can help to build good financial habits and accustom you to living on less each month.

However, there are a few potential drawbacks:

If you repay debt using a lump sum, you will save on interest but miss out on the investment growth that could have been achieved.

You may not be able to borrow the same amount again or at the same interest rate.

Large debts can dwarf modest repayments over a long period. The benefits of repayment can seem a long way off, impacting morale.

Investing

The other option is to keep some of your debt and invest your money instead.

The goal is to achieve investment returns exceeding the debt's interest. For low-interest debts such as mortgages, long-term investment returns may exceed borrowing costs. However, this is not guaranteed. Most non-mortgage debts, especially those with high interest rates (e.g., credit cards or payday loans), are unlikely to be offset by investment growth.

The advantages of this route are:

It’s possible (although not guaranteed) to make more money over the longer term.

There is an element of speculation that appeals to some investors.

There is a great deal of flexibility over investment options in the current market. It’s possible to choose the tax wrapper, provider and investment fund that best suits your needs and offers value for money.

However, there are some risks:

Investments can lose money. While a degree of fluctuation is expected, there is always a risk that a market fall could occur, just as you need to withdraw the money.

Most non-mortgage debts have an interest rate too high or a timescale too short to be offset by investments.

Historically, it was common to opt for an interest-only mortgage and set up an investment-linked endowment policy to pay off the capital, though this practice has declined in recent years. However, many investors experienced shortfalls as the endowment growth rates failed to keep up with interest. Of course, many more investment options are available today, which means that the complexity and high charges applicable to many endowment policies may no longer be an issue.

It can be tempting to draw on the invested funds early for other purposes. This can be difficult to recover from.

Interest rates could rise, which means that you need to invest more to ensure your funds keep up.

This strategy is better suited to lump sum investing, as you can benefit from investment growth from the outset.

It can take time to build up a large enough fund through monthly investing, during which time the interest on your debt will be building up.

Your Attitude to Risk

The best option for you will depend on how you feel about risk.

Repaying your debts is the lower-risk option, as your money is not subject to investment fluctuations and your liabilities are guaranteed to reduce.

Consider investing the money if you have a strong appetite for risk and can cope with investment volatility.

While current interest rates and historic investment growth suggest that this option will leave you better off, this is by no means guaranteed.

You could face a shortfall just like many endowment investors experienced.

Investing your money rather than repaying debt could be for you if:

Your only debt is a mortgage.

You have an adequate emergency fund.

You have a lump sum to invest.

You can handle the risk and understand that investments fluctuate.

You are unlikely to need early access to the money.

You have other assets and/or income to provide flexibility if your situation changes.

You have the discipline to stick to the strategy.

Please do not hesitate to contact a member of the team to find out more about your investment options.

Please note:

Investing involves risk. The value of investments can go down as well as up, and you may get back less than you invested. Past performance is not a reliable indicator of future results. Tax treatment depends on your individual circumstances and may be subject to change. This content is for information purposes only and does not constitute personal financial advice or a recommendation. Wealth management advice should be tailored to your unique goals and circumstances. We recommend seeking professional financial advice before making any investment or financial decisions.

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