Unexpected inheritence - overpay mortgage?

squirrelou

I have a mortgage with £44,000 outstanding on the balance (on a property worth ~£125000) and interest rate of 3%. I have been diligently scrimping and saving over the last few years to try to overpay as much as I can (I'm allowed to do 10% of the balance annually without charge)

I've just unexpectedly inherited £50,000 that I honestly never knew I would get. My first thought was that I should use this to pay off the mortgage straight away, but now I'm not sure if that is the most effective use of the money. The early repayment charge and mortgage closure fee come to £2500. The early repayment charges (£2200) would end in May 2018 when my fixed deal finishes.

I'm not great at maths, but I think if I waited until May 2018 to pay it off, I'd have still paid more in the interest than those charges? Although, the money could also be earning interest somewhere until then?

A relative also pointed out other possible uses of the money:

• Use it to get a buy-to-let property as a long term investment.
• Use some of it for an additional pension
• Use it to get a bigger property than the small flat I live in now, either retaining my flat as a rental investment or selling my flat at the same time
• Lock it away in a high interest savings account until the mortgage charges no longer apply, or to see the direction my life goes in, e.g. I might end up meeting someone and starting a family, wanting a career break/change and wish that the money wasn't tied up in my property.

My financial priorities:

• In the short term, I have been saving to buy my first car. I have the money for that already.
• I also like to travel a lot. I think I have a sufficient amount saved up for my travel plans for the next 3 years already, but with this new money I'm aware that I could do much more! I have regretted over the years that I never went travelling for an extended period, gap year, etc. I wouldn't immediately want to do that though (i.e. not in the next 1-2 years).
• I have a more than adequate emergency fund for problems with the house, if I become unemployed, etc.
• I would like to retire at 60 and want to be able to afford to work part-time or in a less demanding role at a lower grade towards the end of my career. My retirement age is meant to be 68.
• I would like a family one day, but I know I might not achieve that. If I did, I'd want to work part time, at least until the children were in school.

Other relevant background on me:

• I work full time (basic rate taxpayer) and there's good job security in my field.
• I have the civil service pension (Nuvos, 6 years built up in it now. I do wish I'd started a pension earlier though)
• I'm in my early 30s
• I have no dependents but my mother has serious health problems and I expect will need some kind of care in the next ten years
• The property I'm in now is a small-ish 2 bed flat with a garden, which suits my lifestyle now (single, living alone) but it would not be large enough for a family. I've always thought that if I end up co-habiting or having a family that I would move to a larger place, but it's never felt worth doing that until I get to that point as I'm happy where I am now.

Grateful for any thoughts... I'm leaning towards it still being most sensible to pay off the mortgage, and then start diligently saving all the money that would have gone into the mortgage for perhaps a future early retirement fund, etc. But I did also wonder about the buy to let idea.

capwhitt

Maybe just me but if I got unexpected money and I was financially ok I would spend it on something fun! Spend it on travelling, if you invest it so it becomes something when you are older your travelling opportunities will be more limited.

jstiff

What a situation to find yourself in. Congrats on the money, maybe not so as to why you received it. Hopefully all coping OK.

Anyway, if it was myself personally, going on your age (I am similar) and circumstances, I would buy the car you intended, don't get a better one just because you have extra now. Use £40k for a buy to let (not sure on property prices/yields in your area) and the remaining as either emergency/travel money.

That's on the assumption you're happy with your current property, have no issues with mortgage.

Use it to invest and enjoy a bit, after all I am sure the person who was kind enough to leave you some would want you to get enjoyment out of it.

Thrugelmir

You should be able to make limited overpayments on your mortgage. Without incurring early repayment charges.

If you wish to leave work before your normal retirement age. Then a personal pension would be an option to consider. As this would provide the funds to live on until you can can draw your state and work pension. Drawing your work pension early would result in a lower pension from that source.

Take your time spending the money. Very easy for it all to go very quickly. While there's a thrill spending it now. Using it for longer term benefit will ultimately be far more satisfying.

Jhoney_2

Half the o/s mortgage IN ALLOWABLE INCREMENTS - that should keep you comfortable should the worst happen with work etc. You also have your rainy day fund which you should try to keep hold of no matter what you choose. Buy your car as planned and within your original budget. Do more of the travelling if that's what makes you happy. Perhaps top up your pension.

The buy to let thing is not going to be easy or practical if travelling - and quite a responsibility that will impact your time, plans and money no matter how well managed.

Paying down some of the mortgage will also bode well for your plans for a family if you need to live on 1 wage etc for the early years.

Goldiegirl

You appear to have made good provision for your current needs.

Maybe a three way split would work, between the travel fund, the mortgage and your pension/early retirement fund.

Planning for the future is important, and a lot of people also like to reduce the mortgage as soon as they can.

But as it's an expected windfall, I think you should also get some pleasure out of it now. You never know what's around the corner, so it's also important to live now, rather than wait for some date in the future, which may never actually arrive.

Broadwood

squirrelou wrote: »

....................... I'm leaning towards it still being most sensible to pay off the mortgage, and then start diligently saving all the money that would have gone into the mortgage for perhaps a future early retirement fund, etc. But I did also wonder about the buy to let idea.

We were 48 when we found ourselves in a similar position but via a voluntary redundancy package after 25 years service. I walked straight into another job, so having only a very small amount left on the mortgage, we got a few upgrades done on the house and put the rest into NS Indexed Linked accounts and high interest long-term savings accounts which we review and move annually if necessary. Wife doesn't pay tax so savings accounts are in her name to get gross interest paid. We run 2 reliable cars (one 10 y/o, the other 12 y/o) and would never buy a brand new one unless we won the lottery which we don't even do. They lose too much hard-earned cash the moment you drive off the forecourt and during their first year.

Roll forward 10 years and I'm now working on a zero-hours but long-term contract averaging 4 shifts per week by choice. This gives a much better work/life balance and I can take holidays when we choose at short notice when bargains come up on Ebay without having to ask if there are spaces in the holiday book.

Personally I have avoided buy-to-let mainly because I've known a few too many people who've been stung by tennants from hell etc., but obviously there is money to be made if you are luckier than some have been.

Life is so much cheaper if you can avoid paying interest if at all possible. A pot of cash doesn't buy happiness but it certainly gives you options which you might not otherwise be able to take.

But always remember that you can't take it with you when you die.

dimbo61

What can you get for £175,000/£195,000 in your area.
3 bed semi with garden ! Easy to rent out for 12/24 months to a family after getting all the reference/credit checks done.
If you do have a family you have a garden, garage, parking, more space.
If you want to rent a room on ERM or spareroom you can have company and earn £4250 Tax free
In the mean time you can move into a bigger property with only one next door neighbour.
Keep the mortgage and make overpayments when you can

IainHL

I agree with Jhoney and Goldiegirl.


Pay the allowed 10% off the mortgage balance each year, certainly for the next 2 years.


However, and if you are allowed to, keep the monthly mortgage payment at the same level as now, either with a formal term variation, or informally. Hopefully your mortgage company can allow you to do it in a way that means the extra doesn't count as overpayments, meaning next year you can still pay nearly another £4k off without penalty, the year after ~£3.6k.


You could then maintain this approach for a few years, or decide to redeem the mortgage in May 2018, when you can do so without penalty.