Enough inheritance to pay mortgage, how to play it

cloo · 4 November 2019 at 5:23PM

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?

Eco_Miser · 4 November 2019 at 6:32PM

You (will) have a pile of cash, and a mortgage with about 3½ years to run before you can pay it off without penalty.

You could

pay it all off.
pay the maximum overpayment that doesn't attract penalties.
just pay the standard amount for that 3½ 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.

cloud_dog · 4 November 2019 at 6:39PM

cloo wrote: »

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?

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).

cloo · 4 November 2019 at 7:44PM

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 · 4 November 2019 at 8:07PM

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 · 4 November 2019 at 9:01PM

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 · 4 November 2019 at 9:08PM

cloud_dog wrote: »

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).

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.

enthusiasticsaver · 4 November 2019 at 9:27PM

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.

cloo · 4 November 2019 at 10:26PM

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.

cloud_dog · 5 November 2019 at 12:43AM

bowlhead99 wrote: »

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.

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.

Brynsam · 5 November 2019 at 12:49AM

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?

Enough inheritance to pay mortgage, how to play it

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