50k inheritance - how best to spend?

[25BeautifulGnomes]

I am in the fortunate (or not so fortunate, depending on how you look at it) position of having 50k that I was not expecting. Our mortgage is 200k and we are on a bad rate for 2 more years. Would it make sense to pay a large chunk off the mortgage to get our monthly repayments down and free up some disposable income?

We want to be sensible but also would quite like to do some work on the house. We have some small debts which will be paid off first.

Thanks for any advice. I posted about this in investments but no resposes so trying here.

Definitely pay off the debts first. Then you need to check if there are any penalties for early redemption (or overpayments) on your mortgage. (My lender, for example, allows an overpayment of up to 10% of the starting year balance without penalty.) Then get a costing for your home improvements. Finally plan a 'rainy day fund' of easy-access cash.

Then it's a question of doing the maths and looking at your priorities to work out which is the best combination for you. If you need the improvements most, use the money for that and pay a smaller amount off the mortgage. If you need more disposable income most, pay more off the mortgage. Good luck

Thanks Cogito, sound advice as usual . Our lender has the same rule re overpayments. Thing is we don't actually need the improvements as such, I'd just quite like them. Will need to do some maths!

We inherited £30k last year. We split it 5 ways -

£2K to fettle house
£7K savings for DS
£7K savings for DD
£7K into mortgage
£7K put aside for holidays, but DH was made redundant, so we had to use it for living.

What does "fettle" mean please?

Do you have any existing savings?

My plan would be debts, 10% of mortgage (because it will improve the rate you can get when you re-mortgage and could save you ££££s over the term), and then make sure you've got 3-6 months worth of bills in the bank.
Then spend anything left over on house improvements and/or a holiday.

We were in a similar fortunate position a few years ago and we paid a chunk off the mortgage BUT then kept our monthly payments the same so we reduced the mortgage period by years . It would be worth seeing if you could do a similar thing without penalties.

fettle means straighten/sort out

Since your outstanding mortgage is still large at £200K, I would pay off as much as possible. If the home improvements are not critical, urgent, I would rather save for those separately.
DH and I cleared our mortgage last year and I cannot tell you how liberating it is. Keep the repayments the same.

Good advice from all. And whatever way you look at it, a windfall of £50k is fortunate!

@Songbird... 'inheritance' suggests someone had to die for the windfall to happen ....

Thankyou everyone for this very useful advice. We don't need to do any work on the house aside from small, cheapish things like painting etc so sensibility says not to do any major work till further down the line.

Timeto ask I bet that feels amazing!

Alibaba we have a very small amount of savings so a buffer of at least 3 months outgoings is definitely on our list.

And yes, sadly someone did die for the money to be available

Sorry for your loss. Should have said that originally.

Are you from Cumbria Bikerunski?

That's the only place I have heard the word fettle used.

I'm from London, but dad from NE and have lived in Yorkshire for a long, long time now. I thought "fettle" was quite well known, clearly not! I have no idea where I picked it up, i've used it forever. Have spent a lot of time in Cumbria though, work and holidays.

OP - re "Would it make sense to pay a large chunk off the mortgage"

It depends on your mortgage rate. What is the rate that you call "bad rate for 2 more years"? And how much longer does your mortgage have to go?

(I studied & worked in finance)

'inheritance' suggests someone had to die for the windfall to happen ....

Well, yes, that's usually how it happens..

We all die anyway one day.

I for one will be happy to be able to leave something for my loved ones to enjoy when I pass over... (no guarantees of course).

Agree with most.

1. Pay off those litle, but expensive debts (credit cards, etc)
2. Look at the Ts&Cs on your mortgage to see what the penalty would be to overpay now, and ask your mortgage company for some figures on what you would save in interest, against the penalty your would pay, and then compare with what rate you could earn by locking the money away for 2 years until you come out of your 'lock in' with your mortgage. There is no general rule, it depends on your individual Ts&Cs.
3. Put aside a small amount to do something to "remember" the person you have lost. I wish I could think of a better word - (maybe commemorate?)... a bench, a tree, maybe take yourselves on a lovely holiday them get a canvass made of the best photo as a momento.

I am usually very 'sensible' tight with money, but it's good to remember who it came from too

Thanks everyone for your comments

CoteDAzur - 25 more years to run and rate just over 6%

BackforGood - we can overpay by 10% for every 12 month period. Yes I like the idea of having something to commemorate, I plan to do that.

Cogito - thanks

While 6% is indeed a high rate (for now), it is only for another two years and if you are restricted to capital repayment of only 10% over your monthly rate, that is not going to make a great change to your payments.

Since it is very difficult to get over 6% return (without high risk) in current low interest rate climate, I would normally advise you to throw this money into the mortgage and pay back a chunk of the capital. But that is not possible, so you want to find a way to get a return of close to or preferably over 6% for your 50K. For this, you have several options:

(1) Put the money in a good fund that invests in corporate & sovereign bonds. Templeton has a good one that has been quite successful lately. Ask about it to your banker. Actually, Templeton has a good "global return" fund that has also been doing well.
(2) Select 2-3 bonds to invest in yourself. Good banks have research departments that come up with recommendations like this. I like this bank but they are not so focused on GBP and I suppose you would not want to take currency risk (of investing in EUR, for example, and potentially lose money if GBP/EUR suffers).

When you select bonds, you will see that good quality (= lower risk) bonds don't have anything near 6% yield. (Always look at yield and not the coupon interest rate. Yield is the return that you will actually get). You have two options:
a) Accept 3-4% yield
b) Leverage: Ask your bank how much they would let you borrow against your 50K and for what rate. If the interest rate they plan to charge you is lower than the yield of the bond you plan to invest in, you can increase your return this way.

If you are not comfortable with choosing & investing yourself, go with a good fund. Choose one that has a low management fee & entrance fee.

(By the way: What happens to your mortgage rate in two years? Do you revert to a variable rate? I'm asking because rates will very probably be significantly above their current levels by then, and you might end up paying over 6%. I'm wondering if it would be better to change your mortgage now to a much lower fixed rate. This is something to talk about with your mortgage advisor.)

OP - if i was in your situation I would, after clearing debt:

Pay off 10% of mortgage this year (20K)

Invest 18K in a 1-year bond and when that matures use it to pay off another 10% in a year's time.

Invest the balance for 2 years to pay off larger chunk of your mortgage when your fixed-rate deal ends and you presumably don't have a penalty.

I am not a finance professional however; and it also depends what the value of your house is. 200k mortgae on a house valued at 250k is different proposition to one valued at 500k - and as another posted pointed out that has a big impact on the rate you'll be able to get when you remortgage.

If you go for the mortgage, work out how many years that 'buys' you - we 'bought' a year with some money we got from DH's Aunt. It feels more real that just saying "we paid off X%".

As Cotedazur says, you're not going to get 6% in any short term savings at the mo, and even bonds for up to 3 years are only paying about 3%. Whilst you are right to read the small print and try to avoid early redemption charges on your mortgage, do do the maths.

Anyone who knows about finances, feel free to correct me but...

If you're allowed to overpay by 10% each year without incurring a charge, and your mortgage is £200k, then you can pay off £20k without incurring any charge.

If any early repayment over that is charged at 1%, might it still work out better to pay off more of the mortgage and take the hit on the early repayment charge if it is that low.

For example, if you invested £20k for 2 years at 3% you'd have £21218, earning £1218 gross, just under a grand if you're a basic rate tax payer (but if one of you isn't working, clearly you'd put it in their name).

However, if you're being charged 6% interest on your mortgage, then over 2 years the interest on £20k would be £2472. Therefore even after paying a 1% early payment fee (£2k), you'd have saved £472 in repayments over those 2 years, and have reduced your mortgage for the next 22 years - which for £20k would be £34,431 of interest if charged at 2.5% (which is the lowest mortgage on the market at the mo, apparently).

But if it galls you to pay those thieving bs more money for the pleasure of tying you into a mortgage at an extortionate rate, you could invest in a bond for 2 years, and then pay off another lump, and move the whole thing to another set of thieving b**s.

I know very little about the finer points of finance but i would agree that you could pay off £20k this year, put another £20k into bonds, pay off £18k next year and keep the surplus £2k plus interest for treats etc next year.

With the £10k left over - keep that for ISA's for you and DH (or DC's if you have them). Nice for hols and unexpected bills etc.

DH always says if you have some cash then:

1. Invest a third
2. Save a third
3. Spend a third

His mum taught him that when he was a small child and it has stayed with him for the last 30 years

And of course, I am very sorry for your loss. Such a large amount implies it was a close relative/friend so i know it is bittersweet

Or you could spend it on shoes