Inhertitance pay lump of mortage or not

Miss_Cakey_Bun

Hi there

Last year after some research my husband and I started to buy our council house, we thought long and hard as we could only afford a 20yr mortgage and my husband being 55 ( i am 39) was a big issue. We decided to go ahead and the sums are as follows

House value 08/08 £195,000
purchase price 06/08 £146,000 (thanks to our discount)
Mortgage £146,000
Mortgage fixed for 5 years 5.9%
repayments monthly £1013 ( we can afford this amount and some increase if we really have too)

Other debts £0
Savings around £12,000 in Isa's etc (for emergency's etc)

We discovered this week that within the next year we will inherit around £60,000 and of course with hindsight might have used this for a deposit but given the current mortgage climate probably would have struggled to get a mortgage anyway given my husbands age.
Anyway I am trying to work out if we are best off paying this off as a lump sum from the mortgage or investing it and making over-payments. I have looked at the different calculators and cant quite get the answer. I have also read loads of threads but don't seem to find anyone with a similar issue.

Obviously the quicker we can pay off the mortgage and if we could do this within 10 years (when my husband will retire) it would be fantastic! I know we don't have crystal balls to predict the mortgage rates in 5years time when ours ends but I don't know if I should be trying to take this into consideration too. Being so new to the mortgage and house owning game makes it a bit harder too :-)

Any help and suggestions will be very gratefully received.

Thanks in advance :beer:
Wanda

pandora205

I am in a similar position (smaller mortgage left to pay but in a fixed rate) though I'm keen to pay mine off as soon as possible. I discovered I could pay off a certain amount as a lump sum each year without incurring a penalty, which I am doing. The rest - well I've invested a lump in a high interest savings account, purchased ISAs and have even put a bit in Premium Bonds (I know they're a bad investment - though I've won £500 in 3 months which is good on £21k).

I have spent a bit on other things (holiday, laptops for kids) and have some I may spend on a new kitchen (needed!). I'm also thinking about some cosmetic dentistry... though I can't afford all this and to pay off the mortgage when my fixed rate finishes next May, so I have decisions to make too.

Ultimately noone can tell you what to do... and you are in a long fixed rate arrangement so there may be better ways of investing. I'm not very good at working out the maths on compound interest but I'm sure someone will come along who can!

Miss_Cakey_Bun

Thanks Pandora....nice to know I am not alone :-) lets hope some one stumbles along and finds our plight ...good luck

JayZed

Wanda, you don't say whether you will incur a penalty by paying a lump sum off the mortgage within your 5-year fixed rate term. If there is a penalty (which would probably be something like 3% of the total sum payed, i.e. around £1,800) then it's almost certainly not worth making a lump sum payment at this stage.

You'll certainly want to use your cash ISA allowances this year if you haven't already - the return on a top-rate ISA is going to beat 5.9%.

That still leaves you with £53,000, though. You don't say what tax band you and your husband are in. Assuming you're both basic-rate taxpayers, then you'll need to find a savings rate of at least 7.4% to get a net return of more than 5.9%. From a quick glance at Martin's article on the best fixed-rate savings products, the best deals on the market at the moment appear to be 7.2%.

That being the case, it would appear that if there's no penalty involved in making an early lump-sum repayment of your mortgage, you should go ahead and do it (after using both of your cash ISA allowances). However, I'd be surprised if there's no early repayment penalty on a fixed-rate deal.

However, if there are early repayment penalties, then you may still be able to overpay a certain amount per month or per year without penalties (e.g. £500 a month or something like that). In that case, you may want to put a year's worth of overpayments in an instant-access savings account, and make the regular overpayments out of this account; the remainder you should put in a one-year fixed-rate savings account (higher return, restricted access). At the end of that year, use your cash ISA allowances again, put another year's worth of overpayments into an instant-access account, and put the remainder back into another one-year fixed-rate account - and so on up to the end of year five, at which point you should be able to pay off a lump sum with no penalty.

There are a lot of assumptions built into the above, and other options may be better if some of those assumptions are wrong (e.g. if you're not both basic or higher rate tax payers). There may also be better fixed-rate savings products over a five-year period. But I reckon that all things being equal, the above is probably your best bet.

NB I am NOT a professional financial adviser or mortgage adviser, just an amateur busybody who likes giving advice!

pandora205

Forgot to mention that I've managed to double my mortgage repayments as well without any penalty - This might also be a possible option for you (assuming that like me you would have a penalty if you pay a large sum off).

ailuro2

http://new.egg.com/visitor/0,2388,3_54988--View_1028,00.html

put in your 146 mortgage, your 20 year term, and add a £60,000 lump sum in year two on the link above - you will see that your mortgage can be paid off in time for your DH retiring.

If you can find a rate better than 5.9% after tax, then this would be a better home for the money, but it takes a bit of care doing the right thing to keep this working for you.

IF you could afford more on your mortgage payments if interest rates were to go up, why not pay a bit extra now? We started off paying £50 a month extra, then once we were not noticing it anymore, and extra £100, now we're up to £200 a month. It really makes a difference, and if interest rates go up then we are used to paying out the extra money every month, but now we have found the amount it goes up by is a lot less because of all our overpaying- a win win situation, really.:D

Miss_Cakey_Bun

Thank you all so much looks like a lump sum might be the answer...I will check out what the penelty is on our mortgage for lump sums ..my thinking is that the penelty will be a lot less than the extra interest I will end up paying is I pay the mortgage off standard.

:-) off to look at the documents...

bookduck

Mrs_Hornsey wrote: »

Thank you all so much looks like a lump sum might be the answer...

If you are going to do this, how about rather than pay a 'fine' for paying off early, you may move to a new mortguage at a better rate and also pay in the extra cash at the same time and too get a better rate?

Miss_Cakey_Bun

The set up fees for a new mortgage and all the hastle probably equals the lump sum fine...and of course mortgages are a lot harder to find now than they were last year when we got ours from the abbey, lenders take in to consideretion my husbands age and not many like the idea of lending beyond 65, and we couldnt aford a 10 year mortgage when we started all this.

Thanks for your help tho and I wiull check all the options that are suggested as we do have some time.