Bonus Dilemma: Overpay Your Mortgage or Invest?

So you’ve just received your annual bonus. And it’s time for the million-pound question: Do you invest it for potential greater returns, or do you pay down your mortgage?

At NH Wealth we have extensive experience helping high earners deal with this dilemma.

With the help of strategic financial planning, we can weigh up the pros and cons of both options.

The case for overpaying your mortgage

Pros:

• Positive return as lower future interest payments

• Reduced debt and financial stress

• Potential for better refinancing terms as lower loan to value

Cons:

• Reduced liquidity, as your money is locked in

• Possible early repayment charges

• Missed opportunity for higher returns elsewhere

• Possibly not using tax allowances (e.g. ISA / pension allowances)

The case for investing your bonus

Pros:

• Potential for higher returns, especially if investing in ISAs or pensions.

• Potential for tax relief, especially for higher and additional rate taxpayers making pension contributions.

• Greater liquidity and flexibility.

Cons:

• Market volatility and risk

• Returns are not guaranteed

• Returns may be taxed if investments not wrapped in ISAs or pensions.

Tax implications & strategic considerations

It’s important to understand how your decision is affected by taxes, and how it impacts your broader financial strategy.

That means considering:

• The anticipated net return (after tax) of investing your bonus versus the interest rate on your mortgage.

• If you are eligible for tax relief on pension contributions.

• If you have used your annual allowances e.g. maximising your ISA and pension contributions.

If you’re a high earner, your strategic considerations will also likely include:

• Predictability of future bonuses, which may vary year to year.

• Career trajectory: Are you approaching partnership, or aiming for early retirement?

• Liquidity. Do you need access to your funds for expected (or unexpected!) future expenditure?

Decision making: what’s right for you?

When it comes to making the decision, you should feel confident that you’ve weighed up your options and fully understood the wider implications. It is important to consider your mortgage rate, risk tolerance, anticipated spending requirements as well as many other factors.

A financial adviser can help you bring clarity to this decision. By building a personalised plan that takes account of your circumstances, tax position, and future goals, you can see the trade-offs clearly and choose a route that aligns with both your finances and your lifestyle.

With a structured approach and expert guidance, you can move forward with confidence, knowing your bonus is working in the way that’s right for you.

Next Steps

Don't let your bonus sit idle while you deliberate. The right decision depends on your unique circumstances, and expert guidance can save you thousands in missed opportunities.

At NH Wealth we’re well-versed in giving bespoke advice to high earning professionals to maximise their earning potential from surplus cash.

If you’re ready to solve your bonus dilemma with expert advice, give NH Wealth a call today or book your appointment directly into our calendar.

• This post is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

• The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

• The taxation of the investment is dependent on the individual circumstance of each investor, and may be subject to change in the future.