Paying a lump sum off my mortgage - when?

[Shakermaker]

My mother in law has just given my wife and I a very generous chunk of money from the proceeds of selling her old house, which comes with the strict instructions to only be spent on our own house. Which i am happy with.

But i want to know what our best options are, in this situation.

The total money is £50k

At the moment I am just over 16 months into our fixed-rate deal on the house. We can pay up to 10% of the value without any penalty, and this means I can pay a few pounds over £30k off now. In December when our deal ends we can then use the other £20k when the time comes to see if we want to renegotiate our deal.

Until that time, the remaining money will feed our mortgage and both my wife and I will use the cash to pay off other debts, credit cards etc and the general expenses of having been married from our salaries to the same amount that we currently spend on the mortgage.

Or, do we just keep the £50k until December and use it all then, by which time we will have paid off another £9k in mortgage payments leaving us with circa £41k?

How much can we leave in our joint account before the tax man gets interested, as we don't want s surprise tax demand in April next year!

Or is there an option we haven't considered?

Thanks in advance for your help

[Shakermaker]

Thanks so far
Just to clarify a couple of points that might be relevant:

We only bought the house last year so I expect we are still paying off a load of interest more than we are capital. It was a two year fixed term but based on when we set the product up, so we are able to change it in December this year. So if I pay off now, am I just paying off a load of interest on my current loan, rather than paying off a chunk of capital which I could do in December when we could take out a brand new mortgage and refinance the whole lot?

We bought with only a 10% deposit from selling my old house, knowing this money would come in, but it does me we aren't on the best mortgage rate (still below current variable but not as good as if we had used a 15-20% deposit)

The reduced payments, initially, is certainly more than any interest we would get probably, and would be very helpful as we have only just got married, would like to pay off some debts and then family etc.

Not sure what the penalty would be for overpayment but I'd rather not pay a penalty if I can avoid it.

i do understand the concern over ease of access, but I think I should be OK, managed a few months between sale and purchase of my old house and the only stupid purchase I made was an engagement ring...

[Shakermaker]

swerni said:

foxsasha said:

When you say you can pay off 10% of the value I'm taking that to mean you can over pay each month's payment by 10%?

it's based on a 12 month period, you can do it in one lump or smaller increments.

Correct. If I pay the maximum it will reduce my monthly payments, or I can pay a smaller lump and keep the payments the same.

[Shakermaker]

ikarl said:

Yeah but as foxsasha says, does it mean a 10% overpayment each month (that you can pay all at once) or that you can pay off 10% of the total value of the mortgage each year?

For my mortgage I can only overpay by 10% each month on my repayment - I.e. 600/month means I can pay an additional £60 per month

I spoke with them yesterday and it was 10% each year of the original mortgage value so they lent me just over £300k I can pay up to £30k this year without penalty. At the end of my fixed term period i can then pay off more with no penalty

[Shakermaker]

DonkeyApple said:

Shakermaker said:

I spoke with them yesterday and it was 10% each year of the original mortgage value so they lent me just over £300k I can pay up to £30k this year without penalty. At the end of my fixed term period i can then pay off more with no penalty

I'd just whack in the 30k that you can and stick the 20k remainder in the bank. If they lower your monthly charge as a result put that difference in the bank with the £20k. At the end of the term just transfer the £20k+ to your mortgage account for the logical reason that the return is much better while you look for a new deal.

Two things I would not me is that if you are on a 90% LTV at the moment then 80% may not offer massive rate savings. But you can check that now by doing a quick shop around online to see what level LTVs need to currently be at for that.

Secondly, if your MiL passes away within the next 7 years what provisions do you have to cover the IHT requirement that would arise? https://www.gov.uk/inheritance-tax/gifts

Something that caught my eye in your original post gave me the impression that you'd racked up personal debt since buying this house? I didn't quite understand the bit about the using of the £20k to pay that down but I am assuming this is about paying down expensive debt but replenishing the £20k over the coming months out of future income? Which seems logical so long as you have the discipline to just not continue living in excess on consumer debt and conveniently forgetting to pay back the £20k?

Thanks, sounds like the right kind of idea.

The debt thing.... Yeah, I've got a few quid on credit card that I would like to pay off as does my wife. So I think what we will both do is to have £20k in the bank, and until the end of the year, that will pay mortgage but still give us another chunk in a few months. Whilst this is going on, the money I normally pay from my salary into my mortgage I can divert in to credit cards instead, as can wife. Come next year will have paid them off too and switch back to normal manner of things

[Shakermaker]

DonkeyApple said:

As credit card debt is stupidly expensive would it not make sense to clear all of that crappy debt first? Seems out of step to have the logic to pay down mortgage debt that is heftier than any suitable cash return and then reverse that logic when it comes to the even more expensive credit card debt.

I'd think it more logical to pay £30k into the mortgage to knock off a chunk of that debt and simultaneously use the remaining £20k that you cannot yet offset against the mortgage debt to remove all consumer debt then use your onward income to replenish that element of the £20k ASAP along with adding the interest you are saving on the new lower mortgage amount ready for 8 months time when you can use the £20k when you remortgage.

That is an option I had not considered, and sounds like a very sensible idea to me. Think I will check with the wife she's happy with me doing that as it is technically "her" money from her mum but for "our" house - her mum doesn't want to be seen to be bailing me out of debt etc.

Shall see what happens but I like this idea, thank you

[Shakermaker]

DonkeyApple said:

Shakermaker said:

DonkeyApple said:

As credit card debt is stupidly expensive would it not make sense to clear all of that crappy debt first? Seems out of step to have the logic to pay down mortgage debt that is heftier than any suitable cash return and then reverse that logic when it comes to the even more expensive credit card debt.

I'd think it more logical to pay £30k into the mortgage to knock off a chunk of that debt and simultaneously use the remaining £20k that you cannot yet offset against the mortgage debt to remove all consumer debt then use your onward income to replenish that element of the £20k ASAP along with adding the interest you are saving on the new lower mortgage amount ready for 8 months time when you can use the £20k when you remortgage.

That is an option I had not considered, and sounds like a very sensible idea to me. Think I will check with the wife she's happy with me doing that as it is technically "her" money from her mum but for "our" house - her mum doesn't want to be seen to be bailing me out of debt etc.

Shall see what happens but I like this idea, thank you

If it's your debt then your wife could lend you the money out of the remaining £20K to pay it off and you pay her the same level of interest that you are currently paying. I.e you consolidate it all into one sum but all your payments are kept in the family and eventually used to pay down the mortgage debt. Better to pay the interest to the missus than the bank. And as you will be technically raping yourself on a ridiculous interest rate that should keep the MiL happy as it shows common sense and no mickey taking at all. As before, you've got to able to pay down the loan asap and be very comfortable that you won't go and rack up more personal debt etc or you are what's technically termed 'a dead man'

Most definitely.

Thanks for the good advice; I will see what I can do to make this the best outcome!

[Shakermaker]

Update

Thanks for your advice everyone. Very helpful, and put my wife and I on the best track.

Paid the maximum amount off the mortgage with no penalty.

Paid credit card off fully from the remaining funds. New set up is I am paying the same amount into our shared account each month with the view to paying back the amount I used to pay off CC to avoid any more at horrible interest rate.

On track for decent remortgage come December and have just spotted the another thread about revaluing which is of great use.

And I thought this forum was just full of cars...