Windfall - what to do with it? Save or reduce mortgage?

Joe555

Good morning.

I am looking for some thoughts or suggestions as to what to do with a windfall I am about to receive. It will be in the region of £60-65k.

About £18k will be used to pay off credit card, overdraft and loan debt. I presume that this is a no brainer. I will also keep a bit by for some work that needs doing on the house. That will leave me about £40k to invest.

My mortgage is currently £125k and is interest only, fixed rate finishing in just over a year. I have no savings.

What would you do? Save it, pay off 1/3 of the mortgage, get an offset mortgage?

My wife wants to spend it doing a loft conversion to take us to 4 bedrooms. I am not convinced this is a good use of it, especially as work means there is a better than evens chance of having to move house within the next 3 or 4 years.

Thanks in advance for any ideas.

opinions4u

1. Ignore the lump sum for a moment and work out how you got nearly £20k of unsecured debt. Then decide how you're going to ensure you don't get there again. Do clear those debts though.

2. Contingency fund. 3 to 6 months net pay that is ringfenced for real crisis such as illness or redundancy.

3. Likely future purchases that are essential. When will the car need replacing? When are university costs likely? Like you I wouldn't convert a loft if a move is likely - it will add less to value than you spend.

4. A treat. Posh holiday perhaps.

5. Debt reduction if the mortgage rate is higher than savings rates.

Thrugelmir

As your mortgage is interest only what plans do you have for repayment of the debt?

Assuming that your fix was for 5 years. If you had a repayment mortgage mortgage over 25 years. You would have repaid around £13,500 of the capital balance so far. To put matters into perspective.

Joe555

I was planning to get a repayment mortgage when I change next year. Took interest only because when we moved my wife didn't have a job and we wanted to be sure we could afford it.

Joe555

Furthermore, I can make overpayments to my current mortgage of up to £500 per month without penalty. Perhaps I should do that until it's time to remortgage? Can't hurt can it?

Thrugelmir

Makes sense to overpay your mortgage straight away. Then switch onto a repayment basis at the end of the fix.

As OP4U suggests. Take the opportunity to get your finances in order.

kidmugsy

Whether it's worth paying down mortgage now depends on the interest rate. With £40k you could both open an instant access Cash ISA and bung the rest into ns&i Index-Linked Savings Certificates for the two of you. You can cash in the latter with almost no penalty after the first year, and can keep them for up to 5 years. Revisit your decisions when you are arranging your new mortgage or moving house.

Joe555

5.8% unfortunately!

lisyloo

Firstly I think others make a very good point about you (apparently) living beyond your means.
Apologies if I got that wrong but we can only work on the info you've given and it looks like you've got into debt.
You need to look into your budget and work out what's going wrong.
The first step is writing everything down to work out exactly where your money is going. Boring I know, but it's the only way.
You've had some good advice here so don't stick your head in the sand just because you don't like the message.
Best of luck with that :-)

First step - yes pay off the debts although do check out any penalties with the loan (it might not be worth paying off early as they might charge you all the interest anyway). Most likey the interest rates are high.

Second step build up an emergency fund for redundancy (or car crash, boiler breakdown, roof repair).
I would recommend instant access cash ISAs for this, you have a 5340 allwance each this tax year.
How much you need depends on a numbmer of factors such as how quickly you could find another job (bearing in mind wer're in a recession), how much you could cut back your living costs and how big your redundnancy package would be.
6 months living costs would not be unreasonsable in my view.
You could take out a savings account if your wife isn't a tax payer or you could consider NSI certs if you want more than £10,680 ISA allowance.
I would basically agree with opinions4u.
Are there any immediate purchases that need sorting? car? boiler?
Maybe spend a bit on the house.
A treat is no bad thing perhaps a nice hoilday.
I think it's important to feel psychologically that you're both getting something from it.
Then I'd pay off the mortgage.

I would probably do something like

£18K - unsecured debt reduction
£11K - cash ISAs
£5K - NSI
£5K - S&S ISA (pay in monthly for some £ cost averaging)
£3K - holiday
£2K - spend on house
£20 - approx mortgage reduction

Although exact distribution is down to your attitude to risk.
You need to get on top of your ongoing debt (including I/O mortgage), pensions and savings situation.
The fact you've had I/O mortgage and still got into debt, does not look good.
Those of us that manage our finances well have savings for contingency and pensions for the future as well as not taking on debt.
Sorry if that sounds like a lecture but I really do wish you all the best.

Joe555

The unsecured debt that I will pay off will save us £600ish a month. That will be put away to pay for things like the car bills, tax, insurance etc, kids clothes, school uniforms, school trips - all the things that are regular but not every month. For food and petrol we use a Tesco credit card that gets paid off in full every month without fail. Much of it was built up at university and the subsequent few years afterwards of fairly low income jobs, then never really made any significant inroads into it. Currently have about £11000 on cards out of a limit of £15000. They will all go back with the exception of one which I will reduce to a £1000 limit for emergencies, use abroad, internet and so on. It is not a burden I want to have again.

Thanks for all the advice, it is appreciated.

cloud_dog

Regarding the remortgaging.... Whats your LTV ratio?

The reason for the question is that you are likely to get a better interest rate when you remortgage as a lot of lenders have tiered rates depending on your LTV ratio; which might save you additional money over the longer term.