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  • FIRST POST
    • cloo
    • By cloo 4th Nov 19, 4:23 PM
    • 1,224Posts
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    cloo
    Enough inheritance to pay mortgage, how to play it
    • #1
    • 4th Nov 19, 4:23 PM
    Enough inheritance to pay mortgage, how to play it 4th Nov 19 at 4:23 PM
    I'm expecting the in next few weeks the balance of an inhertance now that a property has sold and probate has been cleared. I have about half the total sum already from a life insurance payout, and once all is in I'm expecting, after tax, enough to pay off our mortgage plus another 5-figures more (think 20-50k?)

    Mortgage has 13.5 years to run, only about 18 months into transferring to a 5-year fixed rate and there's still fairly hefty penalities for paying off for another 18 months or so (after that they're fairly small). There was about 199k remaining on the mortgage at the end of 2018. The mortgage was for about 30% of the value of the property when we bought it, so not heavily leveraged.

    I think, at least initially, I am going to draw down enough each month to pay off the mortgage to avoid paying penalties but get the mortgage off our back each month so I can have more to spend and, more importantly, start paying real money into my pension. Maybe once the penalty's less we could just pay off wholesale, although I quite like the idea of keeping the money 'free' so that we might have the option of using a lump sum and 'paying the mortgage' ourselves if that suits.

    I have already put 20k in a 3-year ISA and will probably seek advice on smart things to do with the money as obviously we potentially have 13 years and don't need it all now. And I am aware that in the next 13.5 years interest rates surely have to go up, so that may affect things.

    Does this sound like a reasonable way to play things - are there any obvious opportunities or risks I'm missing?
Page 1
    • Eco Miser
    • By Eco Miser 4th Nov 19, 5:32 PM
    • 3,562 Posts
    • 3,333 Thanks
    Eco Miser
    • #2
    • 4th Nov 19, 5:32 PM
    • #2
    • 4th Nov 19, 5:32 PM
    You (will) have a pile of cash, and a mortgage with about 3 years to run before you can pay it off without penalty.

    You could
    1. pay it all off.
    2. pay the maximum overpayment that doesn't attract penalties.
    3. just pay the standard amount for that 3 years, and spend from the cash pile
    You'll have to calculate if the interest saved exceeds the penalties plus the interest you could gain from the amount not paid off, in each scenario.

    Consider investing via a Stocks & Shares ISA, or filling up your pension now - up to the lower of your total earned income or 40k.
    Eco Miser
    Saving money for well over half a century
    • cloud_dog
    • By cloud_dog 4th Nov 19, 5:39 PM
    • 4,645 Posts
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    cloud_dog
    • #3
    • 4th Nov 19, 5:39 PM
    • #3
    • 4th Nov 19, 5:39 PM
    I'm expecting the in next few weeks the balance of an inhertance now that a property has sold and probate has been cleared. I have about half the total sum already from a life insurance payout, and once all is in I'm expecting, after tax, enough to pay off our mortgage plus another 5-figures more (think 20-50k?)

    Mortgage has 13.5 years to run, only about 18 months into transferring to a 5-year fixed rate and there's still fairly hefty penalities for paying off for another 18 months or so (after that they're fairly small). There was about 199k remaining on the mortgage at the end of 2018. The mortgage was for about 30% of the value of the property when we bought it, so not heavily leveraged.

    I think, at least initially, I am going to draw down enough each month to pay off the mortgage to avoid paying penalties but get the mortgage off our back each month so I can have more to spend and, more importantly, start paying real money into my pension. Maybe once the penalty's less we could just pay off wholesale, although I quite like the idea of keeping the money 'free' so that we might have the option of using a lump sum and 'paying the mortgage' ourselves if that suits.

    I have already put 20k in a 3-year ISA and will probably seek advice on smart things to do with the money as obviously we potentially have 13 years and don't need it all now. And I am aware that in the next 13.5 years interest rates surely have to go up, so that may affect things.

    Does this sound like a reasonable way to play things - are there any obvious opportunities or risks I'm missing?
    Originally posted by cloo
    If you are keen to use most of the money to pay off the mortgage then why not just contact the mortgage provider and ask then to reduce the term of the mortgage to be in line with the remainder of the 5yr deal???

    They may have some reservations, i.e. ability to meet monthly payment etc but perhaps you can show them the money in the bank (so to speak).
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • cloo
    • By cloo 4th Nov 19, 6:44 PM
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    cloo
    • #4
    • 4th Nov 19, 6:44 PM
    • #4
    • 4th Nov 19, 6:44 PM
    Hadn't thought of asking lenders about that, cloud_dog - one to discuss with my husband (once I've got the final reckoning on it we're going to sit down and consider).

    One thing in play is the possibility of also getting a loft extension out of it, if it's the higher end of what I'm expecting. We might need to discuss if we want to do that, or to maybe just keep more and finish off bits and bobs that need redecorating around the house and keep the change. We don't need to extend, though the roof needs some work and it almost seems a shame to renovate the roof and not build into it, but (in London) we are talking 40k+ for that. Two reasons to extend into loft are: we have an au pair and they can only have a rather boxy little room at the moment; and generally we have to assume our kids will need to live with us for a while when they finish their education given the massive cost of living here, so extending might allow for more 'grown up children' space in the long run.
    • Zero Sum
    • By Zero Sum 4th Nov 19, 7:07 PM
    • 1,394 Posts
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    Zero Sum
    • #5
    • 4th Nov 19, 7:07 PM
    • #5
    • 4th Nov 19, 7:07 PM
    Whats the interest rate on mortgage? As could just stash cash in 18 month bond at 2% ish then pay off in 18 months to avoid fees
    • steampowered
    • By steampowered 4th Nov 19, 8:01 PM
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    steampowered
    • #6
    • 4th Nov 19, 8:01 PM
    • #6
    • 4th Nov 19, 8:01 PM
    For most people, rushing to pay off the mortgage is a mistake.

    We live in an era of record low interest rates, you are probably only paying 1-2% on the mortgage.

    Yet you would achieve an instant 20% (or 40% if you are a higher rate tax payer) on pension contributions.

    You could also be using the funds to help use your maximum stocks & shares ISA allowance this year and next. The average historic long term return on balanced stock portfolios is about 6-8% per year, and returns from an ISA are tax free.

    Have a read of https://forums.moneysavingexpert.com/showthread.php?t=6021058.
    • bowlhead99
    • By bowlhead99 4th Nov 19, 8:08 PM
    • 9,557 Posts
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    bowlhead99
    • #7
    • 4th Nov 19, 8:08 PM
    • #7
    • 4th Nov 19, 8:08 PM
    If you are keen to use most of the money to pay off the mortgage then why not just contact the mortgage provider and ask then to reduce the term of the mortgage to be in line with the remainder of the 5yr deal???

    They may have some reservations, i.e. ability to meet monthly payment etc but perhaps you can show them the money in the bank (so to speak).
    Originally posted by cloud_dog
    But that would surely attract early repayment penalties just like manually paying too much each month, because there will be a limit on how much you can overpay in a year. If for example you are only supposed to be able to pay your standard mortgage amount plus 10% of the opening balance per year, they are not going to like you paying off a fifth of the entire mortgage per year. If the plan is really to avoid penalties until the charge is lower, a re-juggling of the term won't help. Still, asking doesn't hurt.

    IMHO if one of the reasons for paying off the mortgage is to be able to have the free cashflow 'to start paying real money into my pension', the obvious solution is to just go ahead and start paying real money into the pension. One would expect the long term returns on a pension investment to be greater than the returns the bank is trying to make from you on their 'investment' in a low LTV residential property-backed mortgage loan, especially if for the moment you're on a low fixed rate deal.

    So I would look at the projected level of the mortgage at the end of the period (with normal payments) and perhaps aim to keep enough money back in interest-bearing accounts to pay most or all of that off when the five years is up (if you want to at that time), and meanwhile throw the rest of the windfall into a pension.

    You don't mention your tax rate. If you are higher rate taxpayer: pay as much as you can towards getting high rate relief on the pension contributions; beyond that amount, hold back for contributions in future years as there's no point blowing the money on contributions at only basic rate relief if you could have instead had higher rate relief by waiting for the next year.
    Last edited by bowlhead99; 04-11-2019 at 8:15 PM.
    • enthusiasticsaver
    • By enthusiasticsaver 4th Nov 19, 8:27 PM
    • 9,591 Posts
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    enthusiasticsaver
    • #8
    • 4th Nov 19, 8:27 PM
    • #8
    • 4th Nov 19, 8:27 PM
    I would concentrate on your pension which is a much more tax efficient way of saving than focusing on your mortgage for now especially if there are penalties. Maybe also look at investing.
    Early retired in December 2017

    I'm a Board Guide on the Debt-Free Wannabe, Mortgages and Endowments, Banking and Budgeting boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Any views are mine and not the official line of moneysavingexpert.com. Pease remember, board guides don't read every post. If you spot an illegal or inappropriate post then please report it to forumteam@moneysavingexpert.com
    • cloo
    • By cloo 4th Nov 19, 9:26 PM
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    cloo
    • #9
    • 4th Nov 19, 9:26 PM
    • #9
    • 4th Nov 19, 9:26 PM
    All interesting stuff, thanks for suggestions.

    For context, I am a a lower rate tax payer and not sure I'll ever break the higher rate barrier in my field. Without mortgage I reckon I could easily pay 500+ per month into my pension now (and more in the future); I am just coming up to turning 42 and my job isn't physically demanding so I'm hoping to carry on for up to another 30 years (my in-laws are both about 30 years older than me and still working!)

    We're in a 4-bed house so in theory could release quite a lot of capital by downsizing on retirement, but I'm not counting on housing prices going up for ever, in fact I rather hope they don't for my children's sake, so I'm not going to rely on that.
    Last edited by cloo; 04-11-2019 at 9:30 PM.
    • cloud_dog
    • By cloud_dog 4th Nov 19, 11:43 PM
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    cloud_dog
    But that would surely attract early repayment penalties just like manually paying too much each month, because there will be a limit on how much you can overpay in a year. If for example you are only supposed to be able to pay your standard mortgage amount plus 10% of the opening balance per year, they are not going to like you paying off a fifth of the entire mortgage per year. If the plan is really to avoid penalties until the charge is lower, a re-juggling of the term won't help. Still, asking doesn't hurt.

    IMHO if one of the reasons for paying off the mortgage is to be able to have the free cashflow 'to start paying real money into my pension', the obvious solution is to just go ahead and start paying real money into the pension. One would expect the long term returns on a pension investment to be greater than the returns the bank is trying to make from you on their 'investment' in a low LTV residential property-backed mortgage loan, especially if for the moment you're on a low fixed rate deal.

    So I would look at the projected level of the mortgage at the end of the period (with normal payments) and perhaps aim to keep enough money back in interest-bearing accounts to pay most or all of that off when the five years is up (if you want to at that time), and meanwhile throw the rest of the windfall into a pension.
    Originally posted by bowlhead99
    Yes, that may be a consideration based on the specifics of the mortgage and or lender but we are fast approaching the end of the calendar year so based on the initial desire to repay the mortgage it is a viable option.

    You would also need to review what constitutes 'overpayment' and if the term is reduced the monthly amount would increase accordingly but this is not an overpayment, it is simply repaying the new monthly mortgage amount.

    I have done this in the past with Nationwide on a further advance. In fact I paid it off within the period of the fixed rate deal but because I adhered to the terms of the mortgage, i.e. 'overpayments' were limited to no more than 500pm, no penalty was applied. This was because the revised increased payments became the actual repayment amount, I added the 500 allowed 'overpayment', and any early repayment penalty was based on the balance at the point of redemption; in my case 0.

    Obviously the specifics of the OPs mortgage would need to be understood.
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • Brynsam
    • By Brynsam 4th Nov 19, 11:49 PM
    • 2,402 Posts
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    Brynsam
    Why not spend some of the windfall on proper independent financial advice, based on a complete understanding of your situation rather than the necessarily piecemeal bits of information appearing here?
    • cloo
    • By cloo 5th Nov 19, 7:50 AM
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    cloo
    As I've said, I'm going to seek advice as well, but I wanted to get some ideas first
    • McXtravert
    • By McXtravert 6th Nov 19, 9:25 AM
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    • 50 Thanks
    McXtravert
    If I was in this position, I personally would choose to pay off the mortgage in one sum. Yes, I might take a hit on overpayment charges, but then I wouldn't have a mortgage 'hanging' over me.

    I would toy with the idea of putting it into pensions, but who is to say we will all live to see pensionable age. I would opt for having lower outgoings today, knowing that I can put more into pensions on a regular basis yet when an unexpected bill fell into my lap, I have the disposable income to meet it without fretting too much.

    Just my thoughts!
    • ian1246
    • By ian1246 6th Nov 19, 3:29 PM
    • 76 Posts
    • 86 Thanks
    ian1246
    Personally I'd keep enough in a easy access account (Marcus, 1.45% interest or something) to pay the monthly mortgage for the rest of the fixed term, plus whatever the overpayment amount is you can make each year without incurring fee's (normally 10%) which you'd pay in a lump sum each year.

    You"d then put the you earn, which up until now were paying your monthly mortgage, into your pension, the benefit of which is you'd be drip feeding into the stock market, helping ease the impact of market volatility.

    As for the rest of the remaining balance? Put it in a fixed saving account (better interest rate than easy access) which matures at around the same time as the fixed mortgage rate.

    This allows you to overpay the mortgage, start building up pension & keep a large chunk of the available, getting the best *safe* return, for when the fixed mortgage term ends & thus no early repayment fee's. You can then assess when that time comes what you want to do - pay off the remaining balance, invest in pension or do a combination of something else - you could even do similar to above i.e. if at the time the fixed mortgage term ends and you can fix at say.... 2% rate for 5 years & there are 5 year fixed saving rates at higher than that, you could always fix your mortgage but also then take a fixed saver with the equivilant to mortgage - effectively earning a higher return than the benefits if you paid off your mortgage, whilst preserving the capital to pay it off should things change.
    • leviathan
    • By leviathan 6th Nov 19, 4:59 PM
    • 252 Posts
    • 149 Thanks
    leviathan
    For most people, rushing to pay off the mortgage is a mistake.
    Originally posted by steampowered
    I think all the points you make are valid except for this one.
    If you pay off your mortgage it's a great noose removed from your neck.
    Yes putting the money into pension would be more tax efficient, but if you loose your job (redundancy or illness) you still have a mortgage to pay and you cannt get that capital back to pay it.


    You can no longer claim mortgage relief from the govt so whilst out of work you're going to have to find a way to pay the mortgage and live off benefits. This is quite hard to do and why many people fall behind.
    But with the mortgage paid off that you own your home isnt considered for benefit purposes. Thats a nice safety net.


    And it's no good having the sum as savings as if you find yourself out of work, you cannot just pay off the mortgage at that point and them claim, no, you have to live off the savings first till you find a job or exhaust them !!




    I think it comes down to risk. And age.
    The OP doesn't say how old they are. If they were 50 then I'd say do the sums and potentially go with your idea of put into pension to claim it back in 5years tax free. If they are 40 I'd say pay off the mortgage and put the mortgage payments into the pension.


    EDIT: I read a later post saying the OP is 42. IMHO, pay it off ASAP and dump the current mortgage payment into pension at the same time so you dont even notice anything has changed financially in your take home.
    Last edited by leviathan; 06-11-2019 at 5:01 PM.
    • cloo
    • By cloo 6th Nov 19, 6:13 PM
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    cloo
    There is the issue that my husband's freelance in quite a volatile field, so I think that's one reason I want to keep the money available. We can't pay all our bills and the mortgage on my salary alone - without the mortgage we can just about manage on my earnings. We've always managed so far with the money in between contracts (he gets a high day rate), but it's been skin of teeth sometimes and the market is really bad right now.

    And honestly no one's job is safe these days - I was made redundant
    7 years ago and it took me six months to find a new job, and I wouldn't be surprised if I have a period of redundancy again before the end of the mortgage term. So that's another reason it suits us to have money available.

    We also have two kids.
    • ian1246
    • By ian1246 6th Nov 19, 10:13 PM
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    ian1246
    There is the issue that my husband's freelance in quite a volatile field, so I think that's one reason I want to keep the money available. We can't pay all our bills and the mortgage on my salary alone - without the mortgage we can just about manage on my earnings. We've always managed so far with the money in between contracts (he gets a high day rate), but it's been skin of teeth sometimes and the market is really bad right now.

    And honestly no one's job is safe these days - I was made redundant
    7 years ago and it took me six months to find a new job, and I wouldn't be surprised if I have a period of redundancy again before the end of the mortgage term. So that's another reason it suits us to have money available.

    We also have two kids.
    Originally posted by cloo
    I think your best bet then would be:

    1.) Put 12months total expenses into an easy saver (Best interest rate you can find), that way should your husband find himself out of work/between contracts, you should be able to manage for 12months+ (More if you factor in your pay covering some of the total expenses).

    2.) Work out what the Overpayment limit is on your mortgage - normally its around 10% of the remaining balance, every year, without incurring repayment fee's (it will provide you this information in your mortgage paperwork - or just ring them up). Put enough into the easy saver account (or take out 1 x 12month fixed saver, 1 x 24months fixed saver & 1 x 36month fixed saver - each maturing to coincide with each year's overpayment-due date) to cover however many overpayments you'll be able to make before the end of the fixed term - then make those overpayments at the start of each year.

    If its based on 10% max overpayment every 12months, with 3 & 1/2 years left on your mortgage fixed term, you should be able to make 4 10% overpayments before the end of your mortgage fixed term (i.e. December 2019, December 2020, December 2021, & December 2022), which would be a massive chunk of the remaining mortgage paid off. This would have a dual effect of saving you on the interest your paying on your mortgage (meaning more of the in your continued monthly payments would be going on paying the capital off vs. without overpayments), whilst also potentially making you eligible for a mortgage holiday if things do become difficult (not all providers offer this, but many do if you have built up substantial overpayment) or, at the very least, allow you to contact your mortgage provider and ask them to recalculate your monthly mortgage payments to factor in the overpayments, whilst still wanting to pay the mortgage off at the original date, reducing your monthly payments accordingly.

    3.) Put the remaining balance into a 3 year fixed saver - meaning it will get you the best interest rate you can and then will mature before your mortgage fixed term matures - then pay off the mortgage when the fixed mortgage term ends, incurring 0 repayment fee's!

    4.) In the meantime, any interest you earn from the easy saver/fixed saver(s) you can chuck into your pension, along with any spare cash.

    5.) After this, your mortgage free :-)
    Last edited by ian1246; 06-11-2019 at 10:16 PM.
    • jeepjunkie
    • By jeepjunkie 7th Nov 19, 6:15 AM
    • 1,683 Posts
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    jeepjunkie
    What can’t you just dump all the cash initially in say a Marcus instant access account. Then the cash can be used to draw down the annual usual 10% overpayment allowance and also feeding uplifted pension contributions? Once you are out of the mortgage tie in then reevaluate?
    • cloo
    • By cloo 7th Nov 19, 9:49 AM
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    cloo
    I definitely need to take a look at the mortgage T&Cs again - I know roughly the penalities for early repayment, but can't recall what it says on overpayment.
    • cloud_dog
    • By cloud_dog 7th Nov 19, 11:13 AM
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    cloud_dog
    I definitely need to take a look at the mortgage T&Cs again - I know roughly the penalities for early repayment, but can't recall what it says on overpayment.
    Originally posted by cloo
    If it is a percentage then that is usually based on a value at the start of the calendar year. Who is it with?

    As mentioned, if you simply reduce the term of the mortgage you will, by default, increase the repayment amount without even going near any 'over payment' consideration.

    Lots to consider but, I think you need to decide on what you wish to achieve and recognise that as the primary reason for your next steps. It may not necessarily be the most appropriate financial decision but one that is most appropriate for you.

    For example, you mention your OH income varies etc, and from a holistic mental/family well being consideration not having to worry about the mortgage would be a huge benefit (if I were in your shoes).
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
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