Use inherritance to best effect?

moongarden

Sorry if this is a bit long winded but we are really not sure which way to go at the moment so would appreciate any pointers!

We've read Martin's remortgaging guide but our case is a little unusual. I inherrited some money from my dad and want to use it to best effect. Some of it is to go into the mortgage but we also want to do some development to the house to expand into an unused area. I guess it is a balancing act between which will give us the best gain vs. giving us the best rate on our mortgage.

The figures stack up as follows;
£138k house purchase (Feb 2008 at the bottom of the market)
£14k deposit - 90% LVR
£124k mortgage at 6.25%!!! fixed for five years (the only mortgage we could get in the height of the crash)
£155 house now worth

Obviously we need to get on a much better rate! We would look to reduce the term of the mortgage rather than the monthly payment.
The other investment would be to spend some of the cash on a building project which could stack up as follows:

£155k house current value
-£40k building project
£210k prospective value - on current market
then remortgage to get better rate for LVR - it it 75% for the next level?

But, building could take say 6 months so what mortgages will there be then? Also the 5 year fixed term exit penalty drops by 1% again in March so that would save us a bit.
Total pot is £70k and the build would be £35-40k (including contingency - we've had 4 quotes and structural engineers report plus building regs approval)

So that's where we are at now... hope you lovely people have some pointers?

shortchanged_2

Are you sure that spending that amount of money on the house will bring you that level of return?

moongarden

Well we can never be certain but there is another house on our street the same as ours which has had the work done and they are currently on the market at £229k but has been sitting there for a couple of months.

We would be adding a bedroom and a second shower room and creating a large open plan kitchen.

I suppose another thing to consider is we want to stay here for a few years - so hopefully the market will pick up over time.

dimbo61

You need to read the T & C ,s of the mortgage offer and check if you can overpay and how is allowed ( 10% a year).
Now you could also contact the lender and see if you can reduce the term ! therefore increasing the mortgage payment each month and use some of the inheritance to make up the difference each month. ( mine charged me £50 to reduce the term)
You should have a good emergency fund of upto £16K in cash ISA,s
If having the extension build makes the house more useable for you and your family thats a good idea and living there for at least the next 5 years means you get use out of the extension and extra bedroom/shower room and bigger kitchen.
BUT in the current market dont expect it to add £40K onto the value of the property overnight.
If other houses on your road are all bigger/more expensive then it might add say £40K to the value!
Building the right size extension is very important as well as the cost of the new kitchen.

Thrugelmir

Rather than incur hefty ERC's. Use your inheritance to overpay the mortgage by the maximum amount every year.

I would question whether the money spent will add as much value as you think. In that a £40k project will add £15k of value.

VAT is rising in the New Year so that will add another £1k of cost.

The future direction of the property is far from certain. So leaving the money on deposit will do no harm. Until the picture becomes clearer.