How best to use a lump sum

legalmind_3

My 2 year fix with Nationwide comes to an end at the end of July and have re-fixed with them at 4.39% for 2 years.

I have been fortunate to have inherited a lump sum of around £30k and intend to pay that off the mortgage. Doing my sums, this will cost me £600 in repayment fees but save me (net of fees) £2000 over the 2 years of the fix.

The maths still seems to suggest it is well worth using the sum in this way but I wondered if I was missing something!

Many thanks.

zag2me

Work out how much interest you could be earning on the 30k in a savings account. It will depend on your tax bracket. Also remember you can get 3k interest free in an ISA.

ReportInvestor

Yes. You could get a fixed cash ISA rate to beat your mortgage rate and make money on that £3K .

Also don't forget to factor in the £500pm extra (£12,000 over two years) that Nationwide allows you to overpay without penalty .

From April 2006 you will be able to pay large lump sums (up to your salary) into a pension - so that might also be worth considering as an alternative.

zzzLazyDaisy

Also, don't forget that some regular savings plans pay way above the normal interest rate. See Martin's article about the 'Savings Fountain'

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1103213261,45760

So you could put the money in the best paying 'instant access' account that you can find. Bung the max in a cash ISA this year and next. Open a couple of regular savings accounts paying high rates of interest, set up DD's from your current account to pay in the maximum amount each month. Don't forget to arrange for that amount to be transfered from your savings account to your current account each month.

If you also take advantage of the £500 overpayment without penalty each month, by the end of the two year fix you will have gained an extra £600 (avoiding the early redemption penalty) and maximised the interest on the balance.

Also, whenever you decide to pay off the lump sum, do consider keeping your mortgage repayments at their current level. I did that, and it is amazing how quickly the capital sum decreases. I am now mortgage free.... BLISS!!!

legalmind_3

Thanks to all who have replied. All hugely useful.

One smaller question... If I am on interest-only now, can I switch to repayment without charges? I was thinking of switching to repayment AND overpaying by £500/month so after 2 years the mortgage had decreased even further.

Great tip Daisy re. keeping payments the same even after you have reduced the mortgage. I like it!