Pay off mortgage or invest?

Kitteridge · 17 June 2018 at 1:32PM

Hi, looking for advice. We currently have a mortgage of just over £100k with 16 years remaining which this month is going onto a follow on rate of 3.79%, so no early redemption penalties if we were to pay it off. We don't have plans to move currently.

We are shortly going to have a gift of £100k from my father and my question is, should we pay off the mortgage or invest? Wife and I are both higher rate taxpayers if that makes any difference. Perhaps we'd be better off saving into our pensions?

If we were to pay it off, we'd aim to cumulatively invest what we'd previously been paying on our mortage, plus a little bit more, with 20-25 years until retirement.

All advice welcomed.

sal_III · 17 June 2018 at 2:02PM

Depends on what are you planning to invest in. Do you have (or plan to have) kids?

1.5-2% mortgage interest rates makes it almost criminal not to take advantage while they last, on the other hand most low risk investments barely yield more than that.

dunstonh · 17 June 2018 at 2:03PM

Wife and I are both higher rate taxpayers if that makes any difference.

Makes a big difference to your retirement planning. 40% relief on pension contribution (and returns on a typical investment spread would be double the mortgage). So, from a financial point of view, pensions blow the overpayments out of the water.

However, that is only in isolation of one bit of info. Other options could apply.

enthusiasticsaver · 17 June 2018 at 2:40PM

3.79% is a relatively high mortgage rate these days so I think I would use at least some of the £100k to repay the mortgage. I think I would then redirect what you were paying in mortgage repayments towards your pension as you higher rate taxpayers with maybe investing part of the £100k by using AVCs or opening SIPPS and making monthly payments into that.

Do you have a decent emergency savings account and are you intending to have children?

Thrugelmir · 17 June 2018 at 2:55PM

How secure is your employment? All factors should be considered before making a decision. If speading the inheritance between different pots might be the way to go. Reduce mortgage, increase pension, increase short term savings, enjoy life a little............

Kitteridge · 17 June 2018 at 4:11PM

Thanks everyone for the comments. I'll try to answer some of your further queries below if that helps:

Depends on what are you planning to invest in. Do you have (or plan to have) kids?

I was thinking about stocks/bonds - complete novice, but understand that long-term, this averages ~6-7% return. We have two young kids and won't be having any more.

Being higher rate taxpayers...makes a big difference to your retirement planning. 40% relief on pension contribution (and returns on a typical investment spread would be double the mortgage). So, from a financial point of view, pensions blow the overpayments out of the water.

However, that is only in isolation of one bit of info. Other options could apply.

We are both public sector, employees, one NHS, one University.

3.79% is a relatively high mortgage rate these days so I think I would use at least some of the £100k to repay the mortgage. I think I would then redirect what you were paying in mortgage repayments towards your pension as you higher rate taxpayers with maybe investing part of the £100k by using AVCs or opening SIPPS and making monthly payments into that.

We'll park the mortgage on this rate until we decide how much (if any) we'll pay off, and can then get a better rate. I guess psychologically it's good to outright own your house, but need to put that to one side and make a pragmatic choice.

Do you have a decent emergency savings account and are you intending to have children?

Yes, 2 young kids, and yes, we do have emergency savings.

How secure is your employment? All factors should be considered before making a decision. If speading the inheritance between different pots might be the way to go. Reduce mortgage, increase pension, increase short term savings, enjoy life a little............

Both on permanent contracts, as secure as these things can be I guess.

Thrugelmir · 17 June 2018 at 5:21PM

Kitteridge wrote: »

Both on permanent contracts, as secure as these things can be I guess.
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Better than most. I'd say take your time then. There's no immediate rush. It's a life changing amount of money that you will want to the most with.

amnblog · 17 June 2018 at 6:49PM

What does your father expect you to do with the money?

Pay off mortgage or invest?

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