Pay inheritance into or mortgage or not?

mrjonny5

I have recently inherited some money and can't quite figure out if it would be best to pay a lump off my mortgage or not. The reason I'm unsure is that we are planning on moving house and are able to port our present mortgage to the new property. In round numbers here are the details:

Present house value: 250K
Present mortgage: 180K
Inheritance: 30K

We are planning to move to a property costing approx. 350K within the next 6 months. Our current mortgage is a standard variable (currently 2.5%) which we can port across to the new house and is guaranteed to be no more than 2% above base rate for life. We will need a second top-up mortgage with our current lender (C&G) to make up the difference in value - we were offered one at 2.49% for 2 years going up to 3.99% although these will probably have changed by the time we come to buy.

So buying the new house we have:

70K equity
180K mortgage ported across
30K cash
70K top up mortgage

What I can't quite get straight in my head is whether we should:

a - pay the inheritance into the current mortgage which ups the equity but we'd need to borrow it back in the top up mortgage at a potentially higher rate to buy the new place

b - put the 30K in a savings account until we move and reduce the amount of the top up mortgage

Anyone got any thoughts on the best option long term?

Thanks in advance.

Jon

monty-doggy

Surely reducing the more expensive mortgage is more sensible as it will cost a lot more over time?

getmore4less

as you will need to borrow more fairly soon keep the cash.

You will not get any new borrowing with a base+2% tracker rate it will be more.

(2.5% is often nationwide their new borrowing will follow onto SMR 3.99%)

With porting it ties the extra borrowing to the same lender so you need to look at the other options not porting, as long as your lender has reasonable add on offers the current lender is likely to be the best.

In the mean time look for a good savings rate, not easy.


if it is a Nationwide BMR mortgage that has benifits that no longer exist so not a good idea to give them up in most cases.

kingstreet

It's C&G in the OP, but same applies.

Keep cash. Do not reduce mortgage. Use cash to have lower amount on higher rated product.

getmore4less

kingstreet wrote: »

It's C&G in the OP, but same applies.

Keep cash. Do not reduce mortgage. Use cash to have lower amount on higher rated product.

thanks, I skimmed.

Stratus

Anyone got any thoughts on the best option long term?

I thought this was a very interesting question to put at the end of your post. It made me wonder if your plans to move house in the short term, may be clouding your longer term judgements.

If you can afford to carry out your plans to move without the inheritance money, then it is quite likely that the return you can achieve with a 30k equity investment will far exceed the interest payments on 30k worth of mortgage.

In the longer term (10-20 years) it's quite likely this nest egg could have amounted to a tidy sum which may give you some flexibility regarding your retirement.

Plenty of people will think this is quite high risk and you may too but it's something to think about. There certainly is risk in such a move, as there is risk in moving up the property ladder in an already overpriced market. No one knows what he future holds.

I think it is important to identify and separate your long and short term goals and decide which your inheritance best serves

mrjonny5

It sounds like the majority are in agreement with what I thought, using the money to reduce the top up mortgage is the way to go.

Stratus - I'm not sure I entirely follow what you are suggesting. By long term I mean that the intention is to stay at the new house for a significant length of time, 15 - 20 years. We can only port our current mortgage once so after this move the question doesn't arise anyway. We could afford to move house without using the inheritance but the repayments obviously go up - are you suggesting investing it elsewhere to get a higher return? What kind of investment did you have in mind?

Stratus

I'm suggesting that as you don't need the inheritance for your next move, 30k invested in the stock market, perhaps buying a diversified portfolio of investment trusts, could return considerably more than the interest payments you save on 30k worth of mortgage - in the long term.

I'm simply suggesting a possible alternative to what others have mentioned. Your idea of using it to set against the size of your second mortgage is certainly the safest and probably best bet in the short term but you were asking for the best option long term. There is greater uncertainty in trying to predict the long term but historically the stock market has performed well on such a timescale.

getmore4less

Stratus wrote: »

I'm suggesting that as you don't need the inheritance for your next move, 30k invested in the stock market, perhaps buying a diversified portfolio of investment trusts, could return considerably more than the interest payments you save on 30k worth of mortgage - in the long term.

I'm simply suggesting a possible alternative to what others have mentioned. Your idea of using it to set against the size of your second mortgage is certainly the safest and probably best bet in the short term but you were asking for the best option long term. There is greater uncertainty in trying to predict the long term but historically the stock market has performed well on such a timescale.

Using that argument means those that can afford to overpay should borrow more and invest it and everyone should go interest only. so they can invest even more.

Stratus

Using that argument means those that can afford to overpay should borrow more and invest it and everyone should go interest only. so they can invest even more.

There's an element of sense in that. Unfortunately the quantities that people can typically overpay are quite small and would be dwarfed by dealing charges but the OP in this instance has a lump sum.

Many people did go interest only in the 70s, 80s and 90s and used an endowment policy to pay off the mortgage. Endowments have lots of problems, not least the commission but the OP could invest in a more adventurous portfolio and potentially see handsome returns. Many people did very well out of endowments (not just the FAs)

One benefit of this approach is diversification. It is often suggested that people should invest across a range of asset classes. Many of us are overweight in property owing to our homes. The OP is considering putting even more money into property. An equity investment provides the opportunity to diversify.

jamesd

The investment cases are pretty easy. Long term investing in the main UK stock market has returned around 5.2% plus inflation, about 9% overall, averaged over the last hundred plus years. For all of the 18 year periods from 1899 to 2012 there were 94 where investing in the UK market beat cash and only one where cash did better. For gilts, a better approximation of mortgage cost, it was 84:11 at 18 years. For 10 years it was 93:10 for cash or 81:22 for gilts. So a high chance of ending up better off, but not absolute certainty. Here are the chances for various terms (source: Barclays Capital Equity Gilt Study 57th edition, 2012, page 69):

equties vs cash
2 years: 67% chance of beating cash
3 years: 69%
4 years: 72%
5 years: 74%
10 years: 90:
18 years: 99%

equities vs gilts:
2 years: 68%
3 years: 75%
4 years: 75%
5 years: 74%
10 years: 79%
18 years: 88%

But there's an even better way. You can get tax relief on your mortgage capital payments. And once you get the tax relief you have a hard time losing for anything but short durations.

To get that what you do is pay into a pension and at age 55 or later you take the pension lump sum to pay money off the mortgage. Age 55 because that's the earlies age at which you can do this. You need to pay in more than the capital payment part of a mortgage if you're doing it with regular payments because you won't be able to get back all of your payment as a lump sum, not even after normal tax relief. The part that remains in the pension is the basis for your retirement planning.

This is the most efficient way there is for most people to be able to pay off the mortgage on their home.

getmore4less wrote: »

Those that can afford to overpay should borrow more and invest it and everyone should go interest only. so they can invest even more.

Not everyone has the risk tolerance for that even though it is the way that is likely to make them better off long term. I do have the risk tolerance for it so I took out an interest only mortgage at an income multiple of a bit over one even though I could have purchased with cash. At the moment my pension lump sum value is more than 70% of the mortgage balance. I'll end up paying off the mortgage just from the tax relief.

On some of my pension contributions I'm getting 58.5% of joint income tax and NI relief: higher rate income tax relief plus basic rate salary sacrifice and some employer NI as well. It's pretty hard for most people who need both retirement income and mortgage clearing to beat that sort of deal, even though most don't get one quite that good and I don't get that much on most of mine.