What to do with inheritance - ideas please

[BoyMeetsWorld]

Hi, sorry for another inheritance thread but I'm a bit clueless. I will be booking to see a FA but I really don't trust them not to be biased in some way so I'd welcome other opinions too.

We've inherited circa 65k.

We already own a property with still approx 315k to pay on the mortgage. It's big but not our dream forever home. We've done a lot of work to it - added around 50k value through extension work already, but We've spent 40k to achieve that so not much profit & are in 2 minds about a loft conversion...that's one of the possible uses of some of the money. I'd also really like to fully recarpet and refloorboard upstairs and get the whole house painted - not sure cost of That, maybe about 10k?

My husband and I both earn decent amounts and are on ok pension schemes with at least 30 years to go until we need them. Our retirement worries me a lot eg how We'll afford to maintain our standard of life although I'd have no issue at all with downsizing or even moving to a much cheaper area of the country at that point...im not at all sentimental with property and places. I don't trust pension schemes these days to still be around when we retire so I don't know how best to use this money to help with that - should we be investing? Or buying to let (is it even enough money to do that or would we end up with actually more debt from 2 mortgages)?

We have 2 kids who are going to need funding through uni etc. they do have savings accounts but will be nowhere near the required amount. So that's a possible consideration too.

So much to think about, 65k actually isn't that much and I doubt We'll get any more windfalls now so want to make the right choices.

Any thoughts at all very welcome.

[ADarkandStormyKnight]

Definitely see an advisor but my thoughts are to split the money, so some on home improvement, some in savings/investments, and a little treat.

Have you got premium bonds? They are low risk and might yield some nice tax free bonuses until you need it for something else.

Bear in mind your mortgage repayments could go up quite a bit when interest rates rise over the next few years, which would be a double whammy if you have a second mortgage. And being a landlord comes with extra responsibilities.

[NoSquirrels]

That’s a big mortgage. The best thing you could do is to pay most of it off the mortgage. Spend a little on carpets or

It’s boring but sensible. Look at how much interest you’ll save on the mortgage by paying it off early - most investment returns won’t best that.

You definitely don’t sound in a position to buy a second property. Loft conversions are expensive.

[ferriswheel]

If you put it towards the mortgage then for every pound youve spent you save three. Im sure your house is beautiful but it regardless of your earnings your outgoings must be substantial. It takes very little to shake up and distress the status quo. Id strongly advise you deal with your debt.

[Jon66]

Put it all away in a shares isa for a rainy day. Who knows what's around the corner . . .

[RaindropsAndSparkles]

£35k off the mortgage (what you save on mortgage payments invested into a bond to mature when DC go to uni).

£10-15k on sprucing up the house. Looks appeal when it comes to selling.

£15-£20k in a savings account to act as your cushion.

[BoyMeetsWorld]

Thanks all, so most people so far reckon we should be using a fair bit to pay towards the mortgage? What about if the housing market were to crash?

[ADarkandStormyKnight]

If the house becomes worth less than the mortgage you end up in negative equity because your mortgage will still need to be paid off, in full.

A rise in interest rates could have a big impact on your repayments, which is why paying some of the mortgage down is a good idea, and keeping some money for a rainy day is also a good idea, in case your circumstances change and you can't pay everything from your monthly income.

[HeadingForSunshine]

It wouldn't alter the fact that you had x amount of mortgage outstanding.

[annandale]

I would put £5k in instant access national savings bonds /premium bonds, and pay £60k off the mortgage.

[Loveanamechange]

Definitely pay some off the mortgage. You’d save thousands in interest.

Check to see how much you can pay off without getting a charge. Then keep £15k as a buffer.

[BoyMeetsWorld]

Ok thanks.

If we were to pay off say 35k of mortgage, use circa 20k on decorating & work to make the loft usable (but not an actual conversion - long story I've discussed elsewhere in a different post), put 5k into PB and keep 5k in our savings as a rainy day buffer, would that make sense?

Or are those trivial amounts not worth bothering with? I'm not really sure how much would need to be paid against mortgage to really make a difference. But I would like us to be able to make at least a bit of home improvement as We've done a lot of extension but the place still looks tatty and I've put up with it quite a while now.

I'm also still worried about our retirement...is the logic that if we protect the mortgage, the house itself becomes our investment for the future years as I'd be planning to sell it for something smaller in a cheaper area one day anyway? I can't see any other way we will be able to save if there's nothing we can do using this money.

We live in South East by the way to add context to the huge mortgage...its actually not so huge for our area.

And of course none of this in any way considers helping the kids out for the future :s

[HeadingForSunshine]

I think that makes sense.
As much sense is made by investing regularly into your pensions from your earned income.

[annandale]

You could look at an additional voluntary contribution to your pension. But why not just save more? When you've paid off a chunk of your mortgage you should have more money in the budget so can do a cash isa with the extra to build up a reserve. It sounds like most of all you need flexible access to funds.

With the loft conversion it depends what it will do for you now that makes it worth £20k to you. The housing market is falling overall right now so I wouldn't do anything as an investment in the house, imo it's easy to take a house way past the average value for the area, people prefer to pay less and do the conversion themselves. So only do stuff you want for your own life. Maybe get the plastering or whatever done professionally and paint yourselves? Then the house will look nice for less. £315k is so huge, any reduction is good but £45k off is better than £35k off.

[NoSquirrels]

I’m a bit worried that you haven’t really researched anything financial so you’re sounding a bit all over the place. You do need to see a FA.

This house is big but not your “forever dream home”. And yet you’ll be happy to downsize in the future. What do you mean by “forever dream home” if not that you’ll stay in it forever? Will you move again from this house to a more expensive “forever” home?

Whilst your mortgage isn’t huge comparatively, it doesn’t really matter because it’s still huge! If the housing market crashes and you’ve got a massive mortgage and your house is worth less, you’ll either be in negative equity or you’ll have very little equity. If you’ve paid down the mortgage you have more equity to play with = more choice. You’ll still lose whatever the house goes down by in value but either way your £315K mortgage needs paying.

What are your “decent” pensions projecting? The aim is to be mortgage-free before retirement- so you don’t need to factor in housing costs to standard of living

The usual advice is housing, pension, then only if affordable saving for children.

I wouldn’t spend £20K on this house, unless you really need the loft for a specific purpose. Spend half that or less on decorating. Put £50K to mortgage, keep £5K accessible if you don’t currently have any other accessible savings.

[vdbfamily]

We had a similar situation. We did some essential work to the house, paid off some mortgage and increased what we put aside for the kids monthly by the amount our mortgage went down. We put some in Premium Bonds which is easily accessible cash if needed and get a £25 win at least every other month.It is quite fun.

[Speedy85]

I'd recommend playing around with a mortgage overpayment calculator such as this one:
www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

The amount you can save by overpaying is astonishing. If you decide to spend money on decorating then you are losing the opportunity to overpay by that amount.

So let's say your mortgage is 315k, over a period of 20 years with an interest rate of 2.5%.

If you invest 55k in paying off the mortgage then you save you £30,799 in interest payments.

Whereas if you invest 35k in paying off the mortgage and spend £20k on redecorating then you will only save you £20,651 in interest payments. So you're losing out on saving ~£10k in interest payments by redecorating. Is the redecorating still worth it when you're effectively having to pay £30k for £20k's worth of work?

My approach is to change things that are relatively cheap/things we can't live with (eg replastering artex ceilings, repainting walls etc) but otherwise throw extra money at paying off the mortgage. Whilst you can go too far with this approach and end up living in an ugly home because of a fixation with paying off the mortgage, there is a happy medium to be found. In an ideal world I'd replace our conservatory with a proper extension, but I know it's not worth it at the moment when, even with a comparatively low mortgage of ~125k we are paying ~£200 each month in interest. I don't mind waiting until we have either cleared or significantly reduced our debt before doing significant work.

Do of course check with your mortgage company before doing overpayments (most will only let you overpay 10% of the balance each year without penalty, so it might be better to overpay some this year and some next year).

[BoyMeetsWorld]

Thanks all for some more really good advice.

The decorating would be mainly painting and recarpwting...I really can't stand the carpets. The loft is a tricky one as we really do need an extra room as a loft / guest room for DH to work from and to have the option to have our overseas family to visit. We do already have a very old loft conversion which is not to current regs but have been told it's good considering it's age by both builders and a structural surveyor (eg the joists are fine). It's likely it would pass regs now except for the major sticking point - it has a safety staircase, and the work to put in a proper staircase is what would take a large chunk of our £. The room would be usable for our purpose as is with probably only around 8k spent on it...but to get it to regs we'd have to spend far more. There would be no further advantage to us, other than resale. We didn't pay for the house as having that as an official room.

We do already have savings in an ISA which are separate to all this (not huge amounts but enough to survive a month or two if one of us lost their job) so it's not like this is our only money.

The mortgage overpayment calculator sounds like a really good idea, I'll have a play with it thank you.

[ExhaustedFather]

Don’t take this the wrong way, but you sound really confused with all things financial. I’d recommend spending some time on money saving expert and having a look at their guides on pensions, ISAs, etc, then asking some more detailed questions (maybe there rather than here), and seeing a financial advisor only as a last resort. You don’t really need to pay for an advisor to understand how ISAs pensions etc work.

When you say you don’t trust pension schemes to be around, are you in defined-benefit plans? If you are in defined-contribution schemes, it isn’t really different from holding any financial investment: it’s your money, not that of the employer nor of the broker where you hold the account.

How much is your monthly mortgage? Fixed, variable, or what? When does the rate reset? How much can you overpay before incurring extra charges?

How much are your monthly salaries net of tax, and how much disposable income are you left with after paying for food, bills, mortgage etc? Earning “decent amounts” can mean vastly different things to different people. How stable are your jobs? How much savings do you have? If one of you were to lose his/her job, how long could you cope before running out of savings?

My job pays well but is very unstable, so if I inherited £65k I’d probably use that money as a safety buffer should I be made redundant, unless I already had savings that could reasonably help me navigate a period in between jobs. For the same reason, unless I had huge savings, I wouldn’t use all of the £65k to overpay the mortgage: yes, your monthly payments would be reduced, but what if you’re made redundant? Let’s say that your monthly payments go down by, I don’t know, £ 250 per month. That’s great. But, should the worst happen and should you be made redundant, will paying £250 less per month be enough, or will it be best to pay £250 more but having tens of thousands of savings you can dip into?

Note there is no ‘right’ answer: that’s what I would do in light of my job situation and my paranoia, eh, prudence – it doesn’t mean that a different approach is wrong!

Also, don’t forget that the alternative to overpaying your mortgage is not only keeping the cash under the mattress – you can and should invest it. In fact, you should compare the ‘cost’ of alternative options: how much you’d save by overpaying vs how much you’d get by not overpaying and investing the cash somewhere else. If you want to invest in cash saving accounts, you’ll almost inevitably end up receiving a lower interest than that on your mortgage; if you’re willing to take a longer-term approach and to invest in stocks and share, you have the potential to earn more than the cost of your mortgage over a longer horizon, but the value of your investment may easily go up and down over the short term.

[1981m]

We invested all our recent inheritance in dividends. They are lower risk ones but obviously still some risk. We spread them carefully between different countries and share indexes. They pay out every 3/6 months and we use this as an extra income.

[1981m]

You're likely to make far more money in investments then the interest you would save paying off a mortgage.

[MachineBee]

I would pay off some of your mortgage as interest rates are starting to rise and it will give you a buffer. I know it’s difficult but try to think of your house as your home, rather than an investment. Even if there is an adjustment in the housing market you will still have a roof over your head. If you lost your jobs, and had overpaid on your mortgage, your lender will more readily agree to a payment holiday until you find another job. And if you are able to pay off your mortgage early, or choose to downsize, having less debt owed on the property gives you more choice when you retire.

[ExhaustedFather]

@1981m, you cannot invest “in dividends” – I imagine you mean you invested in shares or funds that pay relatively high dividends. Yours is a relatively common strategy, but one I am not a huge fan of.

I’d rather a company reinvested earnings in the company itself, than distributed them to shareholders. If I need periodic income, I can easily sell as much of my holdings as I need.

The point is that good companies trade at multiples of their book value; retaining earnings means being able to reinvest them at that multiple, which is different from reinvesting dividends. If you invest in BabyCorp (I mention it because my daughter loves the Boss Baby…) which, say, trades at a 2.5x multiple, then if BabyCorp retains its earnings it means that, for every pound of earning retained, it’s creating 2.5x of value (but of course multiples can and do change), whereas receiving dividends and reinvesting them in BabyCorp means buying shares at 2.5x book value.

Terry Smith explains it very well here:
www.fundsmith.co.uk/news/article/2017/04/20/the-unique-advantage-of-equity-investment

[ExhaustedFather]

@MachineBee "If you lost your jobs, and had overpaid on your mortgage, your lender will more readily agree to a payment holiday until you find another job. "

AFAIK there is no hard rule on this: banks change their criteria all the time, plus there is always an element of discretion, meaning part of the result will depend on which bank employee ends up handling the case.

By contrast, if you lose your job and have tens of thousands of pounds of savings, it becomes easier to navigate while you find another job, without the need to tell your bank anything. But, of course, these decisions are very personal .

[1981m]

Exhausted father- sorry yes wrong use of words. We have put the majority of our inheritance in share investments which pay out dividends. We use these as an extra income to overpay mortgage, pay into savings/ ISA account or do things on house. Use the money to make more money.

[MachineBee]

I’ve been with a few building societies that offer payment holidays as a feature. But I understand the environment has changed in recent years.

Always good to have some savings, as well.