Pay off mortgage or invest?

[Yesnosorryplease]

I know next to nothing about financial planning.

We have never had much money to put away and only have small amounts of savings in Premium Bonds.

We have a few debts - big one being a mortgage of about £230k with 18 years remaining on the term, and then some smaller credit card debts being paid off within 0% period.

We both have work pensions but nothing outside of those. Absolutely no idea how good they are or what they will pay out.

Neither of us expected to be given any lump sums but we have recently been told that we may be gifted around £250k from the sale of a family property. The expectation from the family member is that all recipients end up mortgage free as a result.

I am not counting my chickens as I have no guarantee that this money will come to us, but it has made me wonder if just paying of the mortgage is definitely the right thing to do with the money?

It depends on the interest rate you're paying on the mortgage and how long the rate is fixed. If the rate on the mortgage is higher than you can make by investing the money in some type of safe bond or fixed-income investment, pay off the mortgage.

You can also split it - invest some, use some to pay down the mortgage, or keep some in cash for emergencies.

I'm feeling like splitting it could be a good idea. I don't know how the penalties for laying off the mortgage work in that regard though.

Our rate is fixed for another 3.5 years I think, around 2.15%. The charges for paying it off altogether are nearly £8k, but then we've paid £4k in interest this year alone!

If I were you I would start by gaining a solid understanding of your current position, especially the pension. Your pension scheme should send you an annual statement and you're likely to be able to set up an online account to get information. You need to understand your current position to work out what the best use of the money would be for you.

What about the wishes of the family member? How would they feel if you chose to do something different with the money? A gift from a living relative is quite different from the best use of money you've earned.

When we paid our mortgage off we were in a fixed rate but it was cheeper to pay it off with a penalty. Remember once you've paid it off you have your mortgage payments free so you could do that.

I'd pay the mortgage off and then put aside any excess and your mortgage payments so you don't get used to having that additional money floating around and then look for an investment.

Usually, investing makes more money. However, I think the psychological boost of paying off a mortgage is massive! I'd pay it off, then use the leftover and your usual mortgage payments to pay off all the rest of your debt asap, and then put the money you're used to paying onto the mortgage/debt each month into investments, so your standard of living stays at what you're used to, but you're racking up savings.

I'd pay off the mortgage - it's a debt so being debt free means your future savings really will be savings.

You may find the meaningful money community/ group on Facebook helpful.

Good point @Mia85 but I think if I can explain reasons for decisions to the family member (they are alive but inherited everything so have no real understanding of mortgages etc) they wouldn't necessarily be unhappy for us to use it slightly differently. Paying off the mortgage would be in the mix in some way, but trying to work out whether paying off a big chunk plus our current debts and investing some is better than just laying it all off in one go. I definitely need to do some work around understanding our pensions!

For those saying pay it all off then invest, I just don't see us building up much to invest in a meaningful way.

We currently save very little, often build up little stashes of credit card debts especially for things like DC residential school trips and don't take many holidays. DC have rarely been abroad. I work extra most weeks/weekends to try to keep on top of these extras. We would love to do some more things with them like theatre trips occasionally and some European city breaks before they get too old (teens already) plus I feel the weight of upcoming driving lessons and uni bills.

If we pay the mortgage off we would have about 1k a month extra to play with and I can see that needing to be fairly short term savings for driving lessons, school trips etc, not real lump sums to invest. But maybe I have the wrong feeling about investments and they can be fairly low level?

Having never expected to have large sums to manage, I have not put a lot of time or thought into financial matters but think I need to do a lot of reading!

You can definitely start investing with low monthly sums. If you are interested in looking into it then the sensible way to start is by opening a stocks and shares ISA (or a SIPP if you want a pension) with a low cost provider like Vanguard or Fidelity. You can set up monthly plans for as low as £25 a month with Fidelity. Lots of people use low-cost tracker funds (https://monevator.com/best-global-tracker-funds) that are well diversified. It's not as complex of expensive as you might think and has the potential for much more of a return than savings in cash. It doesn't sound as if it's right for you just at the moment but if you had some spare money each month after paying the mortgage, or had a lump sum to invest then it would be worth looking at. If I were you I would read up on this kind of thing now and then you can work out what you might want to do if they gift is made.

I'd also look carefully at the pensions. The tax benefits make it an attractive possibility especially if you are a higher rate taxpayer and/or you can salary sacrifice. I don't know how old you are or how old you'll be when the mortgage ends but one thing you could think about is keeping (some of) the mortgage and then using the tax free sum from your pension to pay it off. That depends on your ages and also whether freeing cash flow now would be preferable but it's worth looking at as a possibility to consider.

Thanks @Mia85 all really helpful. I will look into the investment stuff as it sound alike something we could potentially try and start doing whatever happens.

Re pensions, I'm in an NHS scheme but I have heard it's not as good as it was. Will never be a HR tax payer! DH is HR but not by a lot, and he has a few different pensions from moving jobs. He doesn't think any of them are great but his current employer does pay a decent chunk in. My next job is to find out more about these and try to understand them. We're both in our 40s and if we kept the mortgage would early 60s when it's due to finish. Our plan was always to sell, downsize and buy something smaller/cheaper when the DC move out as a way of releasing capital.

Before you make any decisions, it would be best to take a pause.
It all sounds rather muddled.
Start by undertaking a detailed inventory of your current financial position - your debts, assets, pensions. Review your monthly budget - what is happening to the money you earn in the family each month. Is it working for you as you would hope?

Then start to think about medium and longer term financial planning... specifically developing financial security and clarifying some financial goals.

At the moment you seem to be bouncing around short term issues centred mainly on your children, but this should not be the focus for working towards building wealth in the longer term. The best way of supporting your dc in the long run is from a place of financial stability, security and knowledge.
Focus on gaining an understanding of how money can be utilised as a tool to build a solid financial base and to invest; to make your money work for you and your family. This is how people of modest means can become wealthy and financially secure.

Try to make substantial headway with this before you are likely to receive any lump sum. Or keep the lump sum in savings and make decisions on what to do when you have this in place. Investing or spending before you have this insight is likely to be a wasted opportunity.

Thank you @seekingasimplelife all good advice and yes, making mistakes is what I'm worried about.

Our plan was always to sell, downsize and buy something smaller/cheaper when the DC move out as a way of releasing capital.

The timing on this can be uncertain. Our son graduated from uni in 2022 and moved back in with us because while he has a very well-paying job, rents are so high here that living on his own would have left him skint. That's fine with us; we love having him home. Our daughter is graduating from uni and getting married this spring, so that's one out of the house. 😁

Once he does move out, I'm not sure I'd want to sell and move to something smaller. We like it here, and I like the idea of having extra room for family to come visit and just having the space to ourselves.

I'm also a big fan of the tracker funds. You won't win the jackpot, but you will get good long-term returns.

Have you considered consulting a fee-only financial planner? We had one do a retirement plan for us and it was really helpful. The fee-only part is important. Some of them earn commissions on financial products they sell you, so they aren't completely impartial.

We only ever bought this house with a view to moving on. It is convenient for the teens but there are much nicer places we could love if we didn't have to consider them getting to school etc!

I think we do need to pay for some financial advice but I need to do some ground work first.

I’d pay off my mortgage (4% fix) before I did anything else.

I’d pay off my mortgage.

You really need a good grasp of what your pensions are though. Surely you know how much your NHS pension will pay you yearly on retirement? You should be getting an annual statement telling you this. It’s impossible to make sound financial decisions without knowing your pension situation.

I've been paying in for about 20 years and haven't received any letters in all of that time!

I’d put the money in a few high interest savings accounts (don’t put more than £85,000 in one) and then pay off the mortgage at the end of your fixed term.

Then put your mortgage payments into an ISA

The expectation from the family member is that all recipients end up mortgage free as a result

So pay off the mortgage - keep it simple. You'd be charged an early repayment fee if you did it in one go so find out what the maximum you can overpay is each year (usually 10% or 20%). Then overpay until the mortgage comes to its term (meanwhile getting a nice rate of interest on the money in a decent paying savings account). Then repay the rest at the end of the term.

@Heatherbell1978 yes I would aim for this eventually but trying to work out how best to achieve that.

I naively had no idea how much interest savings could make! I've been reading about some of the things suggested and have worked out that we can pay 10% off straight away with no penalty. We could then max out our cash isas to get the interest on those tax free, then use high interest accounts. The interest we pay each year on the mortgage is £4-5k so as long as we make more than that from savings, and pay the 10% off each year, I think that works out. As we get closer to the fixed rate period ending the penalty drops loads and at that point we could pay it off, either entirely or a bugger chunk.

I'd mix it up a bit. I'd pay off each year what you can on mortgage without penalty until fix runs out and save the rest in high interest accounts. Yorkshire building society has a 4.8% saver account thats easy access - much higher than mortgage. Put what you need to pay down mortgage short term in there along with what you can't lock up in ISA for tax free. Maybe take a punt and buy a few premium bonds. Also lots of regular savers - nationwide has an 8% one, first direct 7%. Use them also to try maximise interest you can get on that money in short term as extra money/savings for those expenses like driving lessons. Stop yourself getting into the little debts. Don't get into the frame of mind that you have the money sat there so its OK to go a bit wild. Have a goal in mind of something to do with extra money per month when you're done like a holiday to keep you focused. Just something you can enjoy and celebrate on - not a £20K cruise anything obviously!

For that amount of money you really should get solid financial advice. You have a number of factors to consider - mortgage, savings (mix of easily available vs longer term), other debts (eg credit cards, finance on things like cars), cost of kids (which only goes up as they get into the teen years), pensions etc etc.

Your attitude to risk should also be factored in. A good financial advisor will do this and long term forecasting based on different options and assumptions. They will maximise tax efficiency where possible (you mention your husband is only just a HR tax payer so smart tax planning could maximise things like child benefit as well for example, with a big cash sum some going into stocks and shares ISAs could be an option as well).

There are so many variables and options. You need to think short, long and medium term. A good financial advisor that you pay for (not one on commission) will work through all this with you.

I'd probably pay off the most I can each year without a penalty in my mortgage.
Then I'd put a lump sum into both pensions (up to the max that year- it could be 40k but not 100%).

I'd then mix it up and put some in premium bonds and high interest accounts. When your mortgage is up for renewal see what rate you can get and if you can gain more interest from your savings I'd continue to pay off lump sums from savings want year to bring mortgage down.

However as others have said the psychological effect of being mortgage free is amazing. We relocated and were able to use equity to buy mortgage free. I was under 40 so opened a LISa and pay max in per year (4k which is topped up to 5k). I pay money into a Sipp as it's more flexible than my work place pension. I also upped payment to kids junior isa.