To pay off mortgage or not
Discussion
Hi
Sadly my wife will be receiving her inheritance as she has now lost both parents. The first tranche is coming through on 1/11 from a sale of a house and my wife’s share is £330k. she will also receive maybe EUR275k from the sale of another house but this will come maybe in a year.
We are discussing on how best to use the £330k. We are early 40’s. I am in a well paid job which fortunately affords us a decent quality of life and covers all our living expenses and savings etc. We have decent savings in cash and bonds and good pensions. No debt other than our mortgage and no need to upgrade anything like house or cars. We have decent savings for the kids aswell
Our mortgage is almost the amount of the inheritance.
£232k is fixed until June 27 at 2.49% with a total of 25 years to run and £90k is fixed until May 2026 at 6.49% with 23 years left to run. LTV is around 45%.
Our plan for the money was to split across fixed deposits earning an average of 4.7% ant present and max in premium bonds. All relatively secure and will provide more income should we need it.
But should we just pay off the mortgage.
What would you do? We are risk adverse and don't necessarily require more money that investing could bring.
Sadly my wife will be receiving her inheritance as she has now lost both parents. The first tranche is coming through on 1/11 from a sale of a house and my wife’s share is £330k. she will also receive maybe EUR275k from the sale of another house but this will come maybe in a year.
We are discussing on how best to use the £330k. We are early 40’s. I am in a well paid job which fortunately affords us a decent quality of life and covers all our living expenses and savings etc. We have decent savings in cash and bonds and good pensions. No debt other than our mortgage and no need to upgrade anything like house or cars. We have decent savings for the kids aswell
Our mortgage is almost the amount of the inheritance.
£232k is fixed until June 27 at 2.49% with a total of 25 years to run and £90k is fixed until May 2026 at 6.49% with 23 years left to run. LTV is around 45%.
Our plan for the money was to split across fixed deposits earning an average of 4.7% ant present and max in premium bonds. All relatively secure and will provide more income should we need it.
But should we just pay off the mortgage.
What would you do? We are risk adverse and don't necessarily require more money that investing could bring.
It sounds like your thoughts and approach to money is similar to mine.
Many years ago I took out an offset mortgage which has been great for me. When interest rates fell I continued paying off at the same rate. I used bonuses etc. to pay off chunks. The comfort knowing I can take it back at any point so wasn't committing to anything or being penalised for paying off early. For a good few years now the net balance is zero. I keep the facility as it gives me access to chunks of money if I want it but costs nothing when I don't. You could convert to one of these meaning access to money if you need it but no interest to pay on the net balance thanks to the inheritance. You can then save what would have been the mortgage payments or take back amounts if required.
Regarding investing, don't forget you will be taxed on interest outside of an ISA.
Many years ago I took out an offset mortgage which has been great for me. When interest rates fell I continued paying off at the same rate. I used bonuses etc. to pay off chunks. The comfort knowing I can take it back at any point so wasn't committing to anything or being penalised for paying off early. For a good few years now the net balance is zero. I keep the facility as it gives me access to chunks of money if I want it but costs nothing when I don't. You could convert to one of these meaning access to money if you need it but no interest to pay on the net balance thanks to the inheritance. You can then save what would have been the mortgage payments or take back amounts if required.
Regarding investing, don't forget you will be taxed on interest outside of an ISA.
Douglas Quaid said:
It’s risk averse, not risk adverse.
I’d pay off the mortgage.
This. You'll pay tax on the interest unless in an ISA, however be careful for the redemption fees. That 6.49% mortgage might be worthwhile doing if the redemption numbers vs interest charged stack up.I’d pay off the mortgage.
I'll be doing the same when the time comes. Then using the mortgage saving on
First thing to do is to contact your lender(s) and get redemption figures for the two loans. Some lenders have exemptions from early repayment charges in the event of a bereavement, but it’s normally the situation where one half of a couple dies and the life insurance is used to pay off the balance, rather than losing a parent.
Even if you do have ERCs, I suspect the £90k will be worth paying off. The larger amount, possibly not, however ERCs are often based on a sliding scale, so it may prove to be profitable. When calculating any interest payments from holding on to the money, remember to factor in HMRC wanting their cut, you’ll struggle to get that amount into tax-free accounts unfortunately.
Even if you do have ERCs, I suspect the £90k will be worth paying off. The larger amount, possibly not, however ERCs are often based on a sliding scale, so it may prove to be profitable. When calculating any interest payments from holding on to the money, remember to factor in HMRC wanting their cut, you’ll struggle to get that amount into tax-free accounts unfortunately.
My sympathies for your wifes loss
I have been through a similar financial exercise and the answer I found is "it depends".
I think your mortgages will have heavy prepayment charges so likely the maths will shows its better too wait until they get to maturity before paying them off... even just invetsing the monies in a short term interest account and paying the tax on the interest is likely to be better than the mortgage prepayment penalty.
Do you max out all your potential tax free savings (ISAs, SIPPs, premium bonds just to mention the main ones) and do you think you can get better returns in them than your future likely mortgage rates are? If so then paying off mortgage might not be best option. However, I am more risk accepting than many so tend to have lots of exposure to equities which have worked well for me.
The upcoming budget this month will likely tinker around with all sorts of tax wrappers and thresholds for savings so nothing concrete really until then.
My plan currently is to keep a decent cash amount that is readily accessible to pay of my mortgage that comes off a very low fixed rate towards end of next year. If rates were to drop dramatically and/or we went through a stock market crash of sorts between now and then, then I might well change my plans and I would look to lock in another lowmortgage rate with view the stocks would recover so it would be a time to invest rather than pay down debt.
I have been through a similar financial exercise and the answer I found is "it depends".
I think your mortgages will have heavy prepayment charges so likely the maths will shows its better too wait until they get to maturity before paying them off... even just invetsing the monies in a short term interest account and paying the tax on the interest is likely to be better than the mortgage prepayment penalty.
Do you max out all your potential tax free savings (ISAs, SIPPs, premium bonds just to mention the main ones) and do you think you can get better returns in them than your future likely mortgage rates are? If so then paying off mortgage might not be best option. However, I am more risk accepting than many so tend to have lots of exposure to equities which have worked well for me.
The upcoming budget this month will likely tinker around with all sorts of tax wrappers and thresholds for savings so nothing concrete really until then.
My plan currently is to keep a decent cash amount that is readily accessible to pay of my mortgage that comes off a very low fixed rate towards end of next year. If rates were to drop dramatically and/or we went through a stock market crash of sorts between now and then, then I might well change my plans and I would look to lock in another lowmortgage rate with view the stocks would recover so it would be a time to invest rather than pay down debt.
If it were me and I were risk averse, I’d do this:
Clear down the 90k debt
Invest the remaining in a money market fund - one of the safest ways to return 5%
From what you’ve said I don’t see the point of clearing the low interest debt at this stage. You could save the 5% interest for say the next 5-10yrs, then pay the remaining mortgage debt and enjoy the lump sum obtained from the savings interest.
Personally I’d retain a small mortgage for credit rating.
As an aside, and none of my fookin business, but off with decent paying job(s), having 23/25 years left to run on smallish mortgages at early 40’s makes me wonder whether you’ve already made some decisions previously as to whether clearing the mortgage is a priority over other investments/opportunities. If that’s the case, I’d question why the sea change when a lump sum has come into the equation.
I’m a believer in diversification and would probably split the sum three ways - mortgage chunk/investmeng chunk/pension chunk.
As an aside, and none of my fookin business, but off with decent paying job(s), having 23/25 years left to run on smallish mortgages at early 40’s makes me wonder whether you’ve already made some decisions previously as to whether clearing the mortgage is a priority over other investments/opportunities. If that’s the case, I’d question why the sea change when a lump sum has come into the equation.
I’m a believer in diversification and would probably split the sum three ways - mortgage chunk/investmeng chunk/pension chunk.
Shnozz said:
Personally I’d retain a small mortgage for credit rating.
As an aside, and none of my fookin business, but off with decent paying job(s), having 23/25 years left to run on smallish mortgages at early 40’s makes me wonder whether you’ve already made some decisions previously as to whether clearing the mortgage is a priority over other investments/opportunities. If that’s the case, I’d question why the sea change when a lump sum has come into the equation.
I’m a believer in diversification and would probably split the sum three ways - mortgage chunk/investmeng chunk/pension chunk.
Only on pistonheads is a 300 odd k mortgage considered a small one.As an aside, and none of my fookin business, but off with decent paying job(s), having 23/25 years left to run on smallish mortgages at early 40’s makes me wonder whether you’ve already made some decisions previously as to whether clearing the mortgage is a priority over other investments/opportunities. If that’s the case, I’d question why the sea change when a lump sum has come into the equation.
I’m a believer in diversification and would probably split the sum three ways - mortgage chunk/investmeng chunk/pension chunk.
Other than that clearing the mortgage isn't only a financial thing, psychologically it's an amazing feeling knowing that your home is yours come what may.
Porsche-worm said:
Shnozz said:
Personally I’d retain a small mortgage for credit rating.
As an aside, and none of my fookin business, but off with decent paying job(s), having 23/25 years left to run on smallish mortgages at early 40’s makes me wonder whether you’ve already made some decisions previously as to whether clearing the mortgage is a priority over other investments/opportunities. If that’s the case, I’d question why the sea change when a lump sum has come into the equation.
I’m a believer in diversification and would probably split the sum three ways - mortgage chunk/investmeng chunk/pension chunk.
Only on pistonheads is a 300 odd k mortgage considered a small one.As an aside, and none of my fookin business, but off with decent paying job(s), having 23/25 years left to run on smallish mortgages at early 40’s makes me wonder whether you’ve already made some decisions previously as to whether clearing the mortgage is a priority over other investments/opportunities. If that’s the case, I’d question why the sea change when a lump sum has come into the equation.
I’m a believer in diversification and would probably split the sum three ways - mortgage chunk/investmeng chunk/pension chunk.
Other than that clearing the mortgage isn't only a financial thing, psychologically it's an amazing feeling knowing that your home is yours come what may.
They meant leave something like £1000 on the mortgage “maintain a small mortgage” not that £300k is a small mortgage.
Porsche-worm said:
Only on pistonheads is a 300 odd k mortgage considered a small one.
Other than that clearing the mortgage isn't only a financial thing, psychologically it's an amazing feeling knowing that your home is yours come what may.
Folks like OP should have many funds to fall back in times of need, most likely and the psychological element isn’t as strong as it would be if you’re running closer to the wire each month. Also such people tend to have mortgage as a much smaller percentage of their income which makes it less of a concern. Other than that clearing the mortgage isn't only a financial thing, psychologically it's an amazing feeling knowing that your home is yours come what may.
Personally I’d probably look at being tax efficient first off. Are you filling 2xISA / JISA and 2x pension allowances etc already? For many people there’s at least a fair chunk they can shelter there (especially using the look back on allowances) which would likely see my cash before clearing a fairly cheap debt that will be eroded by inflation in time.
You don't say much about your wife's circumstances re income savings, I know you are likely 'as one' being married but perhaps she would like to decide exactly how some is spent?
You could pay off the higher rate mortgage, spread the rest around, I'd say you should definitely encourage her to at least should do something special, trip or purchase etc, something meaningful/memorable, spend some of it on herself.
Then see how that goes knowing the Euro property in a year could clear the other mortgage if you are then so inclined. This pays down some debt keeps the optionality and gives huge buffers, and in a year the extra cash takes household debt down to nil.
You could pay off the higher rate mortgage, spread the rest around, I'd say you should definitely encourage her to at least should do something special, trip or purchase etc, something meaningful/memorable, spend some of it on herself.
Then see how that goes knowing the Euro property in a year could clear the other mortgage if you are then so inclined. This pays down some debt keeps the optionality and gives huge buffers, and in a year the extra cash takes household debt down to nil.
Caddyshack said:
Porsche-worm said:
Shnozz said:
Personally I’d retain a small mortgage for credit rating.
As an aside, and none of my fookin business, but off with decent paying job(s), having 23/25 years left to run on smallish mortgages at early 40’s makes me wonder whether you’ve already made some decisions previously as to whether clearing the mortgage is a priority over other investments/opportunities. If that’s the case, I’d question why the sea change when a lump sum has come into the equation.
I’m a believer in diversification and would probably split the sum three ways - mortgage chunk/investmeng chunk/pension chunk.
Only on pistonheads is a 300 odd k mortgage considered a small one.As an aside, and none of my fookin business, but off with decent paying job(s), having 23/25 years left to run on smallish mortgages at early 40’s makes me wonder whether you’ve already made some decisions previously as to whether clearing the mortgage is a priority over other investments/opportunities. If that’s the case, I’d question why the sea change when a lump sum has come into the equation.
I’m a believer in diversification and would probably split the sum three ways - mortgage chunk/investmeng chunk/pension chunk.
Other than that clearing the mortgage isn't only a financial thing, psychologically it's an amazing feeling knowing that your home is yours come what may.
They meant leave something like £1000 on the mortgage “maintain a small mortgage” not that £300k is a small mortgage.
My point was really that having such a lengthy mortgage at that age despite purporting a decent salary suggests that’s the OP’s attitude to extinguishing the mortgage early doesn’t seem to have been a focus before so just wondering whether it’s the ‘right’ change of focus now a lump sum is involved. As I say, I’m a fan of diversifying and it’s saved my backside truth be told when my income fell substantially out of the blue during 2021 and hasn’t yet recovered. Had my eggs all been in one basket I’m not sure how the picture would have looked.
As someone else has also queried, is your wife on board with ‘investing’ all the money in a jointly owned investment? Not suggesting any issues whatsoever, but I think many would perhaps want a bit of reassurance or additional security around a chunky input to a joint asset if it creates an imbalance. Especially so if that’s an unusual spike in what she will ever likely receive as a lump sum given its sadly as a result of both parents passing. I consider I have a strong relationship with my partner but I think she might be slightly reluctant to invest all her inheritance in one basket paying off our joint mortgage - and I’d wholly respect that if it were her position.
For as long as the low mortgage interest lasts, I'd pop the funds into a fixed rate savings bond or money market fund paying a higher interest rate - free money.
Then when the mortgage introductory period ends (and any early repayment fees cease to apply), withdraw the cash, pay off the mortgage, and up your pension contributions from salary for the equivalent amount that your mortgage payments were.
Then when the mortgage introductory period ends (and any early repayment fees cease to apply), withdraw the cash, pay off the mortgage, and up your pension contributions from salary for the equivalent amount that your mortgage payments were.
interstellar said:
Pay it off. I did it last year and it’s a great feeling!
Totally agreeWe were in our early 50s, but either both of us in the construction industry and very familiar with redundancy and companies folding, paying off the mortgage was an amazing feeling.
The stress of potentially being out of work was bad enough, but knowing that there was no debt and the house was ours 100% helped tremendously.
ETA - We then put the equivalent of our monthly mortgage payments into savings, so we could retire a few years before state pension age.
Plus a few nice holidays
Edited by Slow.Patrol on Thursday 24th October 07:38
My own feelings on this. Not advice.
Mortgage is the cheapest borrowing you’ll ever have.
Both of us have stable jobs we intend to remain in until the mortgage would naturally end. Both in industries that aren’t going anywhere.
So unless a windfall was big enough to remove all debt & still maintain a nice lifestyle I would use the money to fund things that have crappy interest rates (like cars) rather than pay off the mortgage.
However if I was self employed or was in an industry that could see me looking for work over 50 I’d pay the mortgage off as the certainty of my home being secure against almost all eventualities would be a massive comfort.
Mortgage is the cheapest borrowing you’ll ever have.
Both of us have stable jobs we intend to remain in until the mortgage would naturally end. Both in industries that aren’t going anywhere.
So unless a windfall was big enough to remove all debt & still maintain a nice lifestyle I would use the money to fund things that have crappy interest rates (like cars) rather than pay off the mortgage.
However if I was self employed or was in an industry that could see me looking for work over 50 I’d pay the mortgage off as the certainty of my home being secure against almost all eventualities would be a massive comfort.
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