Inheritance - Pay Mortgage or Invest [First World Problem - sorry]

LondonJim_2

Hello to all, 
Sadly mother passed away, after long probate process, looks like I will stand to inherit £350k. Incredibly lucky and fortunate.
Always thought I would use it to pay off mortgage (remaining c.225k) but reading here has prompted a rethink. Mortgage fixed 2.08% until mid 2024.
If I pay off immediately: cost c.235k due to early repayment charges.
If I pay off at end of current fix (2024): total cost c.241k.
If I over-pay the 10% allowed per annum: I'm not clever enough to work this out !!
So, I was thinking, if I take the whole c.350k and invest it somewhere with no/little risk and it makes over 6k in the 30 months - then that is the most prudent thing to do. Right? But does such an investment exist at the moment? 
And then a friend said 'paying off mortgage is not necessarily value add in current environment' - which I don't understand!
I work, public sector with pretty good pay, pension and job security. Aim to retire in about 10 years @ 60. No other substantial savings/assets other than house (c.650k).
Would like to create some family memories now (holidays); save long term for retirement trips & helping the kids; and add to the 'pot' I have inherited.
Feel like it is a slight first world problem question - and I do realise how fortunate I am - but would welcome any advice (presume at least some will be go and see IFA!)
Thanks J

steampowered

Question: Why do you want "no/little risk"? You have a lot of money, and you are saving it for the long term. That is exactly the sort of situation in which you should take a reasonable level of risk.

If you try not to take any risk, the money will erode over time due to inflation. That itself is a risk. For example, if inflation runs at 2.5% for the next 10 years, inflation would reduce the value of your pot by 29% during that period.

You should consider using a chunk of this money to top up your pension. I'm not sure what your pension entitlement looks like but a SIPP is an option. The tax relief you will get on pension contributions will give the money a big uplift. Plus, pensions generate investment returns - perhaps 6% per year on average if your pension is invested in a standard medium risk fund.

You should consider using a chunk of this money to make the most of your stocks & shares ISA allowance - you can invest up to £20k a year this way. You can choose a low cost passive investment fund. Over the last 50 years and the last 10 years the average return generated by the stock markets is 7.5% per year - so that is the sort of return you would get from a stock market tracker fund. A bog standard medium risk investment fund might generate 6% per year on average.

This article provides an excellent explanation of the pros and cons of paying off the mortgage vs. investing: https://ukpersonal.finance/mortgage-overpayments-vs-investments/.

Personally I think it is madness to clear the mortgage earlier than you need to. I am sure it is a nice feeling to be "mortgage free" but the opportunity cost of doing that to your long term wealth is tens of thousands of pounds, if not hundreds.  

Well worth going to see an IFA if you are not happy to do it yourself. 

El_Torro

If you can avoid paying early repayment charges I would certainly do so. You can always save (rather than invest) the money you will need to pay it off in 2024.

If you are going to invest the money (either in SIPPs or ISAs, or unwrapped) then you need to think long term, 10 years plus. Investing now and hoping that in 30 months time the investment will have grown is not a good idea.

I usually fall in the camp of saying that investing is most likely going to put you in a better position financially than paying off the mortgage early. Which is true of course, but looking at your situation I can certainly see the benefits of paying off the mortgage. You can use the money you would have spent on mortgage repayments to go on nice holidays with the family, just don’t forget to think about your future retirement plans and what you think you’ll spend on your kids.

Will your public sector pension be enough to comfortably retire on at 60? If not do you need to start thinking of other pension provisions?

jimjames

I don't understand your numbers although they don't really affect the outcome.

If the balance is now £225k why is it £241k at the end of the fix. Surely it should be lower as no penalties and you've had 3 more years of payments to reduce it?

dunstonh

And then a friend said 'paying off mortgage is not necessarily value add in current environment' - which I don't understand!

When bog standard, middle of the road investments have been returning 5-6% a year on average (through the ups and downs) it can be pointless paying a debt costing 2% whilst missing out on 5-6%.    Things like using your annual ISA allowance, pension contributions etc can be more efficient in the long run.

I work, public sector with pretty good pay, pension and job security

It is very common for public sector workers to never have any involvement with investments until later in life.  Whereas those in the private sector tend to get experience with investing much earlier.   This can lead to poor knowledge and understanding of things like tax wrappers, investments and risk.  Especially risk.

Grenage

On paper as a numbers game, investing the money will be the most financially rewarding long-term - by a large margin.

That said, many people feel more at ease with no mortgage hanging over their head.

MX5huggy

What are the additional pension options available from your current scheme?

after checking you are not going to crash into the Life Time Allowance (you might be closer than you think if you’re a high earner with lots of years service). I would put the maximum in pension either with your current scheme or a SIPP.  Then maximum investment ISA. Do you have a partner? They can do the same.

Steve182

By my maths, had you been in this position a decade ago, and invested the £225K you are considering paying off from the mortgage in the stock market at an average 7%PA compound growth rate which was easily achievable over that period and fairly average historically, it would now be worth £442K

By comparison, if the same £225K was an interest only mortgage at 2% interest it would have accrued £49K in interest liability over the same time period and the total outstanding balance had no repayments been made would now be (£225K+49K) = £324K

So subtracting £324 from £442 you would be £118K better off investing instead of paying mortgage. Of course with a repayment mortgage the interest liability would be less than £49K, so you would not be £118K better off. Realistically I think you might have been somewhere around £100-£110K better off though.   

Type_45

Give it to charity.

george4064

As others have pointed out, you’re better off maintaining the mortgage as is and investing the money. Sounds like you need to put some time into reading about investing so that you can understand where you are currently invested (pension) and so you actually get a S&S ISA/SIPP setup.

LondonJim_2

Huge thanks to all. Genuinely much appreciated and clearly not the easy decision I had presumed. Just to answer the question posed, I worked out the higher cost at end of early repayment period due to monthly payments x 34 + remaining balance.
Have joined our pension society to look at that route, and agreed lots of reading to do.  As always future uncertainty and potential/likely reward balanced against surety and limited returns.
I presume we only get in 'trouble' if mortgage rates shoot up and our invested money is locked away? And again presumably we can structure savings and investment to protect against this. 
Having more to save & invest to maximise returns does make sense and Steve182 that maths is pretty compelling. Dunstonh you are right about both your points. Off to read Steampowered's recommended article. Thanks to all.