Option 1 – reduce his mortgage
This will save Peter just over £58 a month for the next 15 years (£10,500) and reduce his mortgage liability to £180,000.
If Peter was to invest this monthly saving and it grew by 3.5% p.a. it could be worth about £13,800 in 15 years’ time.
Option 2 – invest the lump sum
Assuming the portfolio grows by the same rate Peter’s £20,000 will become just under £33,800 in 15 years’ time. Financially Peter is in exactly the same position, but he has access to his money throughout. If his investment returns are better than this he would be better off.
By proceeding with option 2, Peter has access to his capital throughout. If he finds that he needed to draw on this money after 8 years he would have just under £26,500 available in his portfolio through this option compared to c£6,500 if he had gone with option 1.