Inheritance - pay off the mortgage?

James_Blonde

We've had an inheritance that can almost cover our mortgage.  We're thinking it would be lovely to pay off the mortgage with it, and / or with assistance our ISAs and some savings, but I'm not 100% sure whether it's the sensible thing to do with the money or what the right route to go is, and my brain is mush at the moment.

We have 3 mortgages - 1 x interest only (£100K / £150 per month to October 2025) and 2 x repayment (£42K / £460pm and 5K / £105pm remaining to October 2030 and Jan 2026 respectively)

They're fixed at 1.74% till December 2024.  Early redemption penalties are 3% of the mortgage balance, so £3K on the interest only, and £1.2K and £145 on the repayment

We have 3 Mortgage ISAs - 2 manged with life and critical illness and due to mature in 2025 I believe, and one unmanaged with no maturity date that we can make withdrawals from at any time - to pay off the interest only mortgage.  (We also have a separate life / critical illness policy for the repayment mortgage).  The latest statement that came in over Christmas suggested there was about £49K in my mortgage ISAs with probably 3 years to run - assuming the same for my wife, but her statement hasn't come in yet.  

On the ISAs, just for a bit of background / info - The first 2 ISAs have been paused - no payments are being made into them, they're just there to provide the enhanced life and critical illness policy we couldn't get with the new ISA.  They've got £22K in them.  The newer ISA is sitting at £27K with 3 years left to run to get to the full £45K we'd need to pay off the interest only mortgage.  Just so happens they both now add up to about enough.    

I also asked Nationwide about overpayment amounts.  the 10% allowances are £9925 on the interest only, and £6620 and £1128 on the repayments. 

What would you do?

• I *think* paying off the £5k seems a no brainer - we can cover that between us out of savings.  Is it a no brainer???

• But what about the other 2?  Do the redemption charges wipe out most savings? 

• The ISAs nearly cover the interest only mortgage.  Should we use those to pay it off now?  Should we use the inheritance and keep the ISAs?  2 mortgage ISAs run to 2025, 1 is indefinite.
• Would overpayments be a compromise?  Guessing not that worthwhile on the interest only mortgage
• I take it the life / critical illness policies are likely to go hand in hand with having a mortgage as they were bought to pay off the mortgage in the event of an incident - so once the mortgage goes, even if we were to keep the ISAs, would the life / critical illness go too, or wouldn't pay out perhaps? (Obviously we'd just take out a generic type policy with a different defined benefit?)
• any other gotchas with this??

Hope you can help / point me in the right direction.  I just want to get a general view - may well go to a financial advisor for the detail if needed.  

Thanks!

getmore4less

ERC look like 3% when do they drop to 2% or lower?

when does the 10% reset

FrugalCat

Compare the interest you have left to pay against the amount you'd be penalised.

1. The interest only will cost you £7,200 (48*£150) in interest before the term is up - so paying that off at a £3k penalty would appear beneficial.

2. The £42k fix would cost you about £3k in interest if it ran until the end (at the same interest rate), and about £1,100 until the end of the fix. It works out slightly cheaper to overpay as much as possible, and then pay off the remainder at the end of the fix.

3. The £5k fix would cost you about £230 in interest if it ran until the end (at the same interest rate), and about £160 until the end of the fix. The EPR of £145 seems to be cheaper.


If that's all correct, the best course of action would be to settle (1) and (3) now, and overpay what you can on (2) and settle it in December 2024, free of penalties.

getmore4less

The interest only will cost you £7,200 (48*£150) in interest before the term is up - so paying that off at a £3k penalty would appear beneficial.


You can't use the full remaining term to work out as there may be a change in ERC and  further ERC free payments can be made.

Then there is the investment return to factor.

James_Blonde

getmore4less said:

The interest only will cost you £7,200 (48*£150) in interest before the term is up - so paying that off at a £3k penalty would appear beneficial.


You can't use the full remaining term to work out as there may be a change in ERC and  further ERC free payments can be made.

Then there is the investment return to factor.

Nationwide website ERC calculator seems to suggest it drops 1% per year - so will be 2% in November 2022, 1% in Nov 2023.

I'd expect the 10% to reset then as well, but will call them and find out for sure.  

and on 2)  for the sake of, what... £150?  probably worth just paying it off.

Fab, thanks everyone!  Here's hoping my wife's ISA is the same as mines, though I recall she had already used some of her allowance so potentially not, or potentially a bit more complicated, but maybe manageable.  

getmore4less

for the sake of, what... £150? probably worth just paying it off.



You could break the larger loans into chunks where they are £150 each would that be just be worth paying off if there were10 chunks.


Also with NW I understand 10% is of original amount which effects the calculations.

With the ERC dropping 1% in November that's a comparison of 1% over ~10 months.

Does the 10% have to applied to the parts or can it all go to one bit?

This is ignoring the potential of investment and pensions should you be a 40%

Brie

has anyone mentioned if you need £££ for care fees???  obviously if there's 2 of you the house will be ignored but if both of you need assistance it may be taken into account in the "can they sell it?" point.  Probably you aren't in that region and won't be selling but if you still owe on it it then complicates the matter very nicely for SS. 

Otherwise I'm in the get rid of all the debts camp.  and go wild with the spoils!!!!

MalMonroe

The good thing is that you and your wife are on the same page. Some people who ask for this kind of advice aren't always in sync. 

I'm in the 'pay it off' camp. 

I'm also in the 'don't worry about care fees' camp. I'm 71 now and hope to be here for a while longer without needing any care fees. If I do, hopefully the state will sort me out [I've always paid my own way in life up to now and invested in my own pensions too, never asked the state for a penny ha'pny more than I'm entitled to] but that will only happen if I have lost all my faculties and/or marbles. Many people seem to be getting more and more obsessed with care fees these days. Nobody in my family and none of my friends' families, past or present, have ever needed care fees. Or care for that matter.

Enjoy yourselves while you can and enjoy the benefits of your inheritance. Not everyone gets one of those!

Thrugelmir

General view. Pay the mortgage off. Cancel the life and critical policy.  Fund both your pension schemes. 

getmore4less

The pay off the mortgage should be with the least amount of money.

other factors.
 if a large overpayment does the regular payment reduce or can you continue with the higher payment without penalty?

Could the IO be changed to repayment?
Any charge to shorten full term to increase payment?

James_Blonde

OK, lets update this, and let's roll it back a bit as well....  We've covered the simple questions - It's a bit more complicated though.

The repayment mortgage has now been paid off - so £47K paid off from the inheritance
We still have our interest only mortgage - £101K with the intention of paying that off ASAP

What I didn't say above was that this isn't our inheritance - it's my wife's.  To be clear, that's me speaking, not her.  I'm simply not comfortable using someone else's / her money to pay off my share (and then to have that held over me, and I'm also not especially comfortable with the term "but I pay for everything," which does occasionally unfairly get thrown my way.)  I just want to be all square.  

I'm content that the right thing to do is pay off the mortgage, however I'm trying to figure out the best was for ME to pay off my share.

My wife is able to pay off her part of the interest only mortgage using the inheritance plus the 2 ISAs currently being used to pay for the life and critical illness cover only (nothing is being paid in to them, they're just maintaining themselves at around £20K, and we understand they die with the mortgage anyway, so may as well use them), and keep her main stocks and shares ISA (currently £27K, I have read that they allegedly made around 8% per year for the last 5 years - so it kind of makes sense not to cash it in!)

Obviously, I can't do that - the only way I can pay off my part of the interest only mortgage is to cash in all my ISAs, including the stocks and shares ISA

My wife has suggested I cash in the 2 life assurance ISAs, and give her my stocks and shares ISA, and she'll use the inheritance to pay off the mortgage and keep my ISA.  I'm feeling a bit unsure / uneasy / unhappy with that idea, I think because I'm thinking she's not just taking £27K cash, but is taking on my existing investment that I've put the time and money into, and gaining my interest over and above paying off the mortgage.  However it seems a bit rubbish for me to just cash it in and give her the money and nobody gains from the investment.  

I also still owe my wife 24Kish as my share of the repayment mortgage.  My inclination is to sell a car I'm basically no longer using to pay this off, and it might give me enough extra money (maybe £5k extra?) to keep something in my stocks and shares ISA so I don't need to cash it in completely or give it away or have to pay to start a new investment.  I could obviously pay her off over X years interest only, but.... see paragraph 3!  

The other idea - and I don't think a great one, but I thought I'd float it anyway - is that she pays off her half of the interest only and I keep paying for my half (so interest only on £50K), including paying into / maintaining my ISAs, and also just pay her what would have been my monthly repayment mortgage payment.   But the other phrase often thrown at me is "you've never got any money so we can never do anything / go on holiday" 

So.... er.... what would you suggest??