Pay off mortgage? Keep Premium Bonds? School fees?

RSharkR

Hello everyone, I'd appreciate some thoughts and advice on my situation which is going round-and-round in my head and need some 'hive mind' support!

Over the last 5-6 years I've been an Additional Rate (45% £125k+) taxpayer in a good but unstable contractor role. Owing to various downturns and lack of Govt policy progress this came to an end in April. Since then I've been doing a bit of freelance work (£2-4k per month into my business and which I won't access until next April) whilst also looking for permanent jobs but after 5+ months out of full time work I've started to get panicky, especially as I see my savings erode. Nevertheless, as things stand I've got about £35k of accessible savings in addition to some stocks & shares ISAs which I'd rather not have to dip into.

I've tried to be clever and stash money away whilst I've been earning. As I had no personal savings allowance, I put as much as possible in ISAs (and junior ISAs) and Premium Bonds simply to avoid being taxed on them. We have £150k maxed out across three premium bonds for myself, my partner and our daughter. Given that I'm no longer a higher earner, I'm aware this probably isn't the best option any more. I keep track of our win return, which last year was 4.5% (£5,350) and so far this year is only 3.5%.

My daughter is nearly 4 and currently at a pre-school nursery. From next September, we ideally want to keep her at the same school which then becomes fee-paying, and will require around £1k per month during primary age, going up to around £2k per month at secondary. There's only one state primary school in the region which is very average results wise and anecdotally we don't hear very good things from others who have kids there. Given that I'm now effectively out of work, I'm considering whether to keep her at the fee paying school or not, particularly as there's a natural break in September where she could start afresh. Again, I've tried to be clever and put money aside for this, so I know I can cover at least one years fees saved in advance.

My partner is on a relatively much lower income, earning about £18-20k a year, which gives her about £1200-1300 per month net.

We have a house, worth about £400k which has £105k left on the mortgage, currently at a 4.6% interest rate (about £735 a month), but due to go up to at least 5.1% in January (about £770 a month).

My partner suggested that we use the money from our premium bonds to pay off the mortgage, then use her monthly income to solely go towards the school fees.

On paper, this looks like it makes sense. I could do with some help to sense check this or consider/suggest other options. I'm also conscious of accessibility of funds if something goes wrong, but I feel like i'm in a decent place in terms of savings etc.

Don't get me wrong, I know this looks like a decent balance book, but I'm also aware that with high outgoings and a commitment to a fee paying school, unless my circumstances change soon it could quickly go!

Thanks in advance for any thoughts.

silvercar

Where do all the other children from her primary go to? They are unlikely all to be going to the same state primary, it may be that there is a better one a bit further away. If I was choosing between private primary or secondary, I would go with secondary. You can supplement a state schools teaching with private tutoring if you need to. You can also move her over at age 7 if you decide you can afford it.

RSharkR

https://forums.moneysavingexpert.com/discussion/comment/82159451#Comment_82159451

Her current pre-school nursery is part of the same site as the fee-paying school, the vast majority of the kids there will just transition into the next year up at the same school and probably stay there until they're 18.

Yes I agree, I think secondary is far more important and initially my thinking was only to send her somewhere like that in year 7. But when we looked around it as we were seeking a nursery, we fell in love with it and we decided we'd try to keep her there throughout. But then my circumstances changed and everything is reliant on my finances really. It's certainly an option I'm willing to consider, to put her in a state primary and then reassess when it comes to secondary. But that's as much a debate on schools as on finances … we don't have any other kids so nothing to compare & contrast.

beatthebookienet

My personal order would be
1. Save 12 months emergency fund in cash ISA then premium bonds
2. Beyond that max ISA allowance in S&S global index fund
3. Beyond that premium bonds or mortgage overpayments
4. Either pay the tax on interest or stocks outside an ISA or enjoy life

Don't overthink the small differences in the different options too much as they all are all similar at the end of the day and have their own ups and downs depending on your situation

Newbie_John

Well, paying off the mortgage you'll free yourself from £750 monthly expense, leaving you with still nearly £100k savings. With current % rates if I was able to do that myself I would.

I personally think the otherwise with schools, I think primary is more important as it will plant the idea that learning is fun, important and appreciated. If your circumstances change in the future you can always move to the original plan of state school and tutoring if needed.

And on paper, of mortgage is paid of, your partners earning goes towards school - everyhing else is covered by your salary + income from remaining savings.

poseidon1

I have very specific views about eroding or wiping out savings to reduce mortgage outgoings, which is to avoid doing so whilst you have cash flow to maintain mortgage payments.

It takes a long time to accumulate liquid savings from taxed income, even more so where you are taxed at the 45%. Taking those savings to plough into your non income producing home appears counter productive given your short and medium term objectives.

I appreciate on this particular forum , there is a preponderance of views in favour of paying off mortgages ASAP . I find this knee jerk rejection to be irrational if not accompanied by the necessary activity of building wealth separate and distinct from the home ( eg pensions, ISAs, GIA investments etc). In other words diversification.

You need cash for school fees and to maintain mortgage payments. In your position I would leave all my liquid savings intact, and if necessary 'bleed' some of it ( as needed ) to support your spending going forward. This may mean rethinking a fee paying school at primary level, but it is finding an equitable balance between spending now, and eroding your hard won liquid assets.

Arriving at a position of significant home equity achieved by hastily repaying mortgages, can in worse case scenarios lead to equity release in later years to find cash to live off.

born_again

https://forums.moneysavingexpert.com/discussion/comment/82159692#Comment_82159692

Look at mortgage like this, how much is the interest a year? If it is more than (£5,350) which is what PB payed out previous year, Less this year then taking 100K to pay off mortgage is a winner.

Zerforax

I would be inclined to keep liquidity. You already said you work/income is unstable. What if your partner loses their job? Having the cash in hand, you have more flexibility to react.

The other compromise might be to take out £50k out of PB and pay off the mortgage as then it looks more like a manageable £300-350 or so a month