Inheritance vs overpayment?

bungalowbill

Hi,
Any advice very welcome please! I remortgaged in April, 5yrs fixed rate 5.6%. I can overpay up to 10% of this in any year. In the next few months I am due to inherit the equivalent of 10%.

I have worked and re-worked these numbers and come up with a different number each time. Is it better to make the overpayment as soon as I get it...or should I invest the money and wait until just before the first anniversary of the mortgage and pay it then?

Thanks in anticipation

CLAPTON

If the overpayments reduce the capital immediately (i.e. the interest element is then calculated on the lower figure) and you can't achieve a savings AER of more than 5.6% after tax then pay it off asap.
If however they amount doesn't come off the capital until the anniversary then wait.

I would expect it to be applied immediately however.

bungalowbill

Thanks for that...
if its an interest only mortgage, do I have to request that it comes off the capital, or will they do that automatically. Think I read on here somewhere to be careful, although it may have been an old posting.

dimbo61

hi blue moon ( bungalowbill)
consider putting some into cash ISA,s paying up 6.5% with barclays/lloydstsb
also consider the new best buy saver on martin,s e-mail this week paying 7.11% before tax if you or your OH do not pay tax !
Always wise to have 3/6 months of income in easy access account earning a good rate of interest of course. GOOD LUCK

CLAPTON

Any extra payment will reduce the capital... it's just that I'm not sure whether it's applied immediately ... I would assume so but what do the T&Cs say?

bungalowbill

Just read the t&c's blurb...

..."you may repay up to 10% of the original motgage each year without charge...after making overpayment we will recalcualte your monthly mortgage payment so the term stays the same..."

If I'm basic rate tax payer, presumably (using MSE calculator) I would have to get savings above 7% interest to benefit

Soooo have I understood this right, if I can get the inheritance money sitting above 7% until next April I would be better off doing that, or should I still pay it towards the mortgage as soon as I get it?

Sorry for the fuzzy head Wasn't really expecting any inheritance money, so not sure what to do with it

CLAPTON

yes that's correect, if you can get more than 7% gross then its better to save than to repay the mortgage


mind you if they are going to recalculate (i.e reduce) the mortgage monthly payment after the overpayment, that rather undoes some of the benefit of overpaying in the first place

bungalowbill

Do you mean because the payments are still spread over the same time frame?

Is there a way round this?

I suppose all I can do is pay the difference into savings for the next year in the hope of using this to overpay in year two...what do other people do in this situation?

jamesd

It's currently easy to get more than 5.6% in cash ISAs so it's likely that you'll be better off than putting the 3600 for this year at least into a cash ISA. Also likely that you'll be better off keeping the cash to do it next April. Since cash ISAs are tax free all you need to do is get anything better than the mortgage rate.

If the amount is still larger than that, you might consider using a mixture of these two funds for the rest:

BlackRock UK Absolute Alpha
Cru Investment Portfolio

Better to hold them in a stocks and shares ISA but even outside an ISA the 9600 a year capital gains tax allowance makes it unlikely that there would be tax to pay. Either is likely to comfortably grow by more than the mortgage interest rate, though it's not guaranteed.

Given the five year term and easy to beat mortgage interest rate it seems unlikely to be worthwhile for you to put any of the money towards the mortgage. The exceptions would be cases where you exceed the savings limits for means tested benefits and are receiving those, or expect to.

nbbradshaw

bungalowbill, your decision is going to rest upon how comfortable you are with your present SOA and taking into account the impending recession (IMHO). With increasing fuel prices etc, you may well feel more comfortable paying off some the mortgage balance. One further benefit of doing this means you'll lower your LTV percentage which may open up your choices of mortgages when and if you decide to remortgage in the future.

Good Luck!

bungalowbill

Thanks all for the help. I didn;t quite understand the jargon above (SOA and LTV) but I think I get the gist.

Realistically a lot will depend on how long the money takes to get to me, and what the rates are at the time, but its given me a few pointers so I can do some of my research ahead of time.

Thx