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How to invest 100k inheritance(48 Posts)
I am soon to inherit in the region of 100k from my late father and wonder where/who I should go to for honest guidance on how to use it effectively. IFA? building society?
I'm in my 50s - have a fixed interest only mortgage of £90k on a tiny, tiny rate; a good occupational pension for later; hardly any savings; and I don't earn much, though enough to keep me ticking over.
I want to use this money wisely. but historically I'm not good at financial decisions so don't want to mess this up.
But her thread title says invest! She says she wants to use the money effectively - how is paying off her mortgage effective as an investment? She's vulnerable, as she is on a lowish income with no savings and the only way to get to any cash in the future would be to do equity release or sell her home and downsize, which costs money for no gain whatsoever.
She says she has hardly any savings and not much in the way of earnings. With a relatively small mortgage on her home she could probably pay it all out of the rental income on an investment property, and still have some left over, which she could either keep for herself or use to pay down her mortgage a bit quicker. If she earns a low wage now then the extra income from rent is unlikely to push her into the next tax bracket. Although if she could swap her current mortgage on her house to one on the rental place instead, she still owes the same amount of money, and her exposure to risk/rate rises etc. is no different, she will still own one house outright, but her mortgage payments on her investment property can be offset against any tax due. You only pay tax on the profit you make. So I agree that paying down her own mortgage would be sensible, but I would recommend she transfers that borrowing to an investment property instead, for tax reasons, rather than just having no mortgage and no extra income.
Just using the money to pay off her own mortgage is comforting but it's hardly effective.
Plus if she ever did need to get to any of that cash she could sell the investment property (hopefully at a profit if she keeps it long enough) without having to either borrow again to take equity out of her home, or having to sell her home.
If she was ever made redundant or become unable to work due to illness then she would be forced to start eating into the equity in her home to fund herself, so she'd just be spending that 100k. If she has a second home that is providing a small income it gives her all sorts of other options.
If she is in her 50s with a low wage then she will find it hard to obtain another mortgage in a few years time, and may end up having to do an equity release thing if she is short of cash. If the money is ring fenced in a separate property it can not only make her money month on month and potentially make a good deal of money in capital appreciation (eventually), but ultimately, if she is able to continue working and paying off the mortgage she has (whichever property it is on) she can own two properties outright instead of one. How can that be a bad thing?
If her current home is bigger and more appealing as a rental property and would command much more rent than the investment property then when she has the option of moving into the second property for a while (after retirement if it is a good distance away from where she currently lives and works) and making an even better income by letting her bigger, current home in a more expensive area (presumably) instead. It's a no brainer if you ask me.
BTL is only very risky if you borrow (against your home) too highly to fund it, and you are the victim of sudden interest rate rises that wipe out wipe out any profit on the rent, and the value of the property plummets simultaneously.
If you think you can borrow beyond your means without doing your due diligence, to 'get rich quick' then you will get stung, for sure. But if the OP can afford to sink that 100k into a long term project then even if she sold the house in 10 years time for the same price she paid for it (pretty unlikely actually, over a 10 year period) then having factored in all the rental income over ten years it would still have been a pretty sound investment, and she gets her 100k back at the end of it!
In the case of the OP, there are plenty of places in the country where it is still possible to buy a very rentable 3 bed house for under 100k. Yes there will be a little leg work involved, and a little risk, but as investments go it's pretty hard to beat compared to most other things she could be doing with the money.
I'd agree with Fellatio, if OP wasn't on an interest only mortgage with no repayment vehicle in place. In those circumstances it would be risky to do anything but use the money for capital repayment on her home.
depends on what the outstanding term on her mortgage is, and the value of her house.....she could convert all or part of it to repayment. Hang on, will do some figures.
Right. I am guessing she is paying around 150 quid month currently (based on 2%) on the 90k outstanding. If she converted all to repayment she'd be looking at paying around 830 quid.
These figures are completely off the top of my head and I have not looked on rightmove to back them up, but let's say that she spends roughly 100k on a house or flat and clears 350 per month after expenses, which should not be out of the question if she picks the right property, she could convert her existing mortgage to 50:50 repayment/interest only (adjusted to take account of her tax position obviously) and use the 350-400 or whatever to pay down a good part of the principle amount. She should rent the property out for maybe six months first before she converts the mortgage, to give herself a cash buffer in case of voids in the letting, as she'll still have to fund the repayment part of the mortgage.
Don't know how long she has outstanding on the 90k but let's say it's ten years. At the end of ten years from now her house should be worth substantially more than it is currently, never mind what is will be worth compared to what she paid for it. (we have no idea what kind of loan to value she has on her home.) Even allowing for housing bubbles bursting it is virtually unheard of to end up with a house that is worth less than you paid for it over a ten year period or more. The OP already has her house now, so unless she is in negative equity now this should stack up. I will assume as she is in her 50's she has a reasonable amount of equity in it already.
She will also have the second property to sell at a (hopefully) a decent profit, to help repay anything still outstanding on the interest only side, and over the course of ten years you can expect the rental income to have risen significantly as well. Of course there is always an element of 'what if' to this, but I see no obvious reason why she should not end up better off than if she just repayed her mortgage in full now.
In fact, let's totally simplify it and forget all that complicated stuff about refinancing to pay off some of the principle.
If she buys another property with the 100k that will be her vehicle to repay the principle 90k at the end of the term - the difference is, it will in all likelihood be worth a fair bit more more than the 100k she paid for it after 10 years so there will be some left over, and it will have brought her an income of several hundred pounds every month for ten years in the meantime. Whereas if she'd just paid down her mortgage there would be no extra income.
Agree with The real Fellatio - DH and I have just had this conversation about our own situation . Use the fact that you have a hefty deposit for a buy to let and research the local availability of suitable properties. If you can look for a two bed flat, first floor, purpose built flat (*not conversion*!) near a local school/hospital with good transport links. Advertise to school teachers or nurses etc, below market rate (as you won't be paying an agents to do F$%& all) - ensure you check they are employed, and you are very very unlikely ever to have a problem. Get a tenancy agreement from WHSmith, make sure you put their deposit in a gvt registered scheme and get a gas -safe registered plumber to do a the annual gas check. Be a good landlord - do not sweat the small stuff, it is their home, and they will stay for ages and give you a good ref when they eventually leave.
It may seem scary to begin with, but it is win-win - you get good tenants, they have a good landlord.
To avoid stress, much better to avoid letting to smokers, or people with DC, pets (ie dogs/cats/rats - obv goldfish and hamsters ok ) , cats or HB claimants.
OP how is your health and how secure is your job?
If you have a second property this will be treated as capital for benefit purposes and you will not be eligible for any state help if something unexpected happened to you which meant that you could not work. You would have to sell the second property then and live off the proceeds or earn enough from the rent with no voids to pay your living costs and pay off your existing mortgage. Really look into all the costs of having a rental property especially if you are not good at DIY and need it to be managed by an agent. Could you live off £350 a month - figure given above with no other income ?? You will not be eligible for universal credit.
If you lose your job or are made redundant are you in an industry where 50 year old women can find work easily as after 6 months , you will have to financially support yourself until you do.
However if you paid off the mortgage on your existing property and say you had an accident or become too sick to work you could be eligible for help from the state if you were below the capital limits.
Also Check your occupational pension terms to see what protection it gives you if you become too sick to work? Can you take your pension early on grounds of ill health?
How would you support yourself if you lost your job?
I read somewhere that people in their 50s who lose their jobs only have a one in ten chance of getting back into full time employment ( as an employee and not as self employed)
If you were made redundant what are your chances of getting employment in your field or other fields?
Thanks for all the responses.
I'm in good health and my job is very secure, though lowish paid.
I will get an occupational pension of £12k pa in 4 years (from another employer) , and could carry on working as well.
other possibility is to buy a flat with cash, getting the better negotiating position that provides, and then afterwards get a mortgage at a level where effectively the renters are paying the mortgage (as the interest will be a legitimate tax deduction), and then used that cash released to pay down your own mortgage?
Lilymaids advice seems spot on
That is exactly what I would do
If the mortgage is paid off then the investment, ie equity, will still increase along with the propery market, at exactly the same rate as a buy to let. Op you would still be paying interest only and then have to presumably sell the buy to let to pay off the interest only mortgage loan amount.
If you pay off the mortgage you'd have a bit left over AND be able to save the money that you currently pay in mortgage interest each month. Put it in something high yield longer term to add to your pensions when you do retire.
I have always had repayment mortgages and paid off extra when I could. I like being mortgage free, it gives you so much freedom work wise and removes a lot of financial stress.
I've also had a buy to let in the past. Won't go into details here but there are some awful tenants, and some people who live rent free by taking properties (even through a lettings agent) then never paying more than the first months rent. Or wreck the place so your landlords insurance rockets so your investment yields less.
I think it depends on how risk averse you are, and I find I am very rial averse these days, sadly through experience.
Just a thought. I agree that paying off mortgage is good idea but then you kiss the money goodbye. Switch to a set off mortgage (loads on the market) whereby any savings set off mortgage costs so there should be no interest payable while mortgage amount is set off but your money always available should you need it.
I'd buy another house outright is poss. Use the rent to pay my mortgage quicker.
Or I'd put a large deposit down on a house to rent (75?) and get a better mortgage deal using the other 25. Lowering mortgage to 65
Buy near a hospital and medical staff in.
Wombats unless I've missed it then you haven't said how you would pay off the capital on your mortgage? You are only paying off the interest now. How do you intend to pay off the remaining loan? Do you plan to work until you are 67 to finance the mortgage? Will you earn enough to pay it off?
You should either pay off the capital now with your £100K or convert the mortgage to repayment and pay off some- maybe 75%- and keep some of your inheritance to have as a nest egg assuming you have nothing for a rainy day- for a new car perhaps, medical treatment you might need privately, an other unforeseen events.
OP have you the stomach for buy to let? Your existing mortgage is tiny. You have a nice amount for a btl that you could put on a property in somewhere like London, which is more or less recession proof if you pick the right area. The market is bubbling again (never really suffered if you stayed within zone 2). A studio or 1 bed, rents are very good at the moment, and if you can pick something up for around 300k it will more than wash it's face. Aim to sell in 10yrs. The growth in London is continuous and if you can't double your money within a decade I'd be hugely surprised. Plus you have an asset that is much safer than a stock portfolio. You might even find that the rent is so good you're making an extra £200 pcm as pin money.
That's what I'd do because from experience it's worked for me.
Good luck, hope it works out and sorry about your father.
i would pay of my mortgage and then may be find a good small company to invest in
Hi Wombatsliketoast, I'm sorry to hear about your loss, it must be a sad time for you. If you want to build your inheritance for wealth, I highly recommend reading How to Make One Hell of a Profit and Still Get to Heaven. It will give the guidelines you need.
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Go to an IFA. Seriously, I know one and he knows so much!
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