Pay off mortgage with inheritance

traceyeric

For a bit of background, we are a mature couple with a young son aged 11
Our last mortgage has another 12 years to run and so doesn't end until I am 66
we owe about 72k
42K is endowment and the only remaining policy for this is maturing in May 2013 but is only paying about 20k
We are about to inherit about 60k but our son has been offered a place after passing entrance tests to a private senior school. My husband wants to pay for him to attend as he feels that he will benefit from this education standard.
My question is should we pay off as much of the mortgage and car loan with the inheritance then we just have the school fees to pay or continue the mortgage and use the inheritance?

suburbanwifey

To be perfectly honest, I would without a shadow of a doubt clear that mortgage. Clearing the mortgage gives you and your husband and your son (indirectly) a secure, safe future. School fees can then be paid for by yourselves. If anything happened, school fees can be done without, mortgages have to be paid or you become homeless. That is what I would. I don't have children, this is true, but if I did and I was in your exact situation, this is what I would do. I have no mortgage now and I cannot tell you what freedom and security that gives you. Use your inheritance wisely, treat it as money you never had, have never seen. Pay that mortgage off.

opinions4u

What rate of interest are you paying on the mortgage?

suburbanwifey

Regardless of the rate of interest, its wisest to pay the mortgage off. Interest fluctuates. fixed rates end, 0.5% base rates don't last 12 years ...

opinions4u

suburbanwifey wrote: »

Regardless of the rate of interest, its wisest to pay the mortgage off. Interest fluctuates. fixed rates end, 0.5% base rates don't last 12 years ...

There is £60k available here.

Lets say, for arguments sake, that the mortgage is a low tracker at BofE plus 0.50% - a total rate of 1.00%.

The annual interest cost is £600 (without taking in to account capital reduction caused by normal mortgage payments).

Let's also agree that it should be possible for a couple to save over £22k in tax free easy access ISAs paying 3% or more between now and 6th April. Perhaps one parent in a lower earner and the other £38k can also be saved at a rate of 3% and an R85 declaration made.

The annual interest income is £1,800.

While rates are as they are, is it really sensible to chuck £1,200 a year away for the benefit of a bank?

Now if the mortgage rate is higher than the savings rates that can be achieved I quite agree that debt repayment should be prioritised.

But the scenario I highlight above is real enough today for many people and is something the the OP could review regularly to ensure that if savings rates and mortgage rates move from their current favorable position to one where the mortgage costs more than the savings earn ... then that's the time to pay down the debt with easy access funds.

£1,200 a year (risk free) for somebody shelling out £9k+ in school fees is something I really don't think you should be telling somebody to ignore by using a one size fits all approach.

ultrarunner

How many years would 60k pay for, and how many years education do you need to pay for?

I would opt for the education over the mortgage I think if 60k would cover the education for 11 - 18.

Amy56

I apologise in advance for this post - i am relatively new to the boards and might possibly be missing something - so this question is as much to help my understanding as it is to help you - I hope thats ok?!!;)

If you have £42K on endowment and the policy is only going to cover £20K of that - have you provision to pay off the remaining £22K? If not, my immediate response was to at least use £22k of the inheritance to clear that - otherwise how were you planning to repay that aspect of the loan?

(No one else seems to have asked that - so as I say, maybe I am missing the point - but I know if I was in your shoes I would be worried about clearing the shortfall).:)

opinions4u

Amy56 wrote: »

I apologise in advance for this post - i am relatively new to the boards and might possibly be missing something - so this question is as much to help my understanding as it is to help you - I hope thats ok?!!;)

If you have £42K on endowment and the policy is only going to cover £20K of that - have you provision to pay off the remaining £22K? If not, my immediate response was to at least use £22k of the inheritance to clear that - otherwise how were you planning to repay that aspect of the loan?

(No one else seems to have asked that - so as I say, maybe I am missing the point - but I know if I was in your shoes I would be worried about clearing the shortfall).:)

Don't apologise!

It's a perfectly sensible point.

It's a shame the OP hasn't hung around a little bit to provide a bit more information, as the oppotunity to make suggestions on more of the specifics of the situation would be good.

Hopefully they'll be back later.

Spiggle

You make a very valid point Amy56,

We don't know what the mortgage rate is and it could be 5%+ for all we know.

Irrespective of that, clearing the endowment portion of the mortgage makes the most sense and leaves some of the inheritance left to save at the best rates. It would also presumably reduce the monthly outgoings to service the mortgage significantly which could be allocated to school fees or savings.

Then in May next year when, for instance, three 1 yr fixed ISAs mature (one in each name for this year and the remainder in fixed 1 yrs subscribed to after 6th April) and the endowment matures, the remainder of the mortgage can be paid off.

That way, all risk of not being able to clear the interest only portion of the mortgage is removed, monthly outgoings are reduced to enable school fees payments, earned interest can be maximised over the short term and the OP is mortgage free end free of monthly payments in a little over a year.

Mind you, if the interest rate was 5%+ I'd be tempted to get rid of £60k worth of the mortgage now and the remainder next May, but that's just me.

All the best,
Spigs

magpiecottage

We really need to know what the school fees are before valid guidance can be given.

However, I would say pay £42K off the mortgage now if you can. If the endowment has a shortfall of £22K in 2013 then really you will need that amount over and above the endowment's maturity value then anyway.

Pay the extra £20K because that way you will be the equivalent to a tax free return equal to the rate your lender charges. When the endowment matures you will then have a capital sum to replace it.

In the meantime, you still have £18K left over to meet this year's payments.

You might also want to consider the possibility of taking out an offset mortgage, the pay the inheritance (and endowment in due course) against it and borrow back as and when you need to pay fees. It can be cost effective but you need to be disciplined.

moneyinmypocket

If it where me I would pay the morgage off with the money your coming into.