Inheritance - mortgage or private school

[Confusionrains]

Have namechanged for this question as I know inheritance questions on MN are not very popular!

DH has just inherited a sum of money (£100k) from a family member. We have one baby DC and 2 mortgages (one for our main residence of about £650k outstanding and another from a rental property of £160k outstanding).

We would love to send our DC to private school in the future, and will struggle to save up enough to fund it I think.

Would it be madness to save the inheritance money to use for private school in the future, rather than put toward our (hefty) mortgages?

If you pay off the mortgage, would you be able to pay the school fees from the extra income?

What's your rate of return, net, on your rental property?

Mortgage, and whichever one has the highest interest rate. You'll struggle to get returns on the £100k (depending on your risk profile) that beat the interest paid on the mortgage.

Perhaps then use the money saved on the mortgage towards school fees.

Think about seeing a decent IFA.

Mortgage. Saves you a huge amount of money in interest, and if you can improve your loan to value ratio you may be able to get a better deal on your outstanding mortgage.

Mortgage. Then you can use the money you save to pay school fees.

Personally I would pay the mortgage of which ever has the higher interest rate. Probably your buy to let. Then use the btl money to send your dc to private for senior school, I personally find a good primary school is as good as most private schools at that age.

Definitely the mortgage

Thank you all for being gentle, and for the good advice.

You are all right I guess, the mortgage(s) do represent our most expensive debt. We are both relatively young (early 30s) so perhaps by paying down our mortgages we can save a little more.

I suppose I just saw the inheritance as a chance to get one of the many 'to do' things (save up for private school) ticked off, but paying something off the mortgages is another big thing too.

This is very rough, but put the figures into here

www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator#results

It's a vast amount of interest that you'll save. Better than any return you'll ever get on any saving account

We would love to send our DC to private school in the future

You don't know that. Schools may have changed dramatically by then.
Pay off mortgages and you will have excess income every month - save that somewhere sensible. I know someone who went through University loan-free due to the income from the BTL bought in their name.

Bird in the hand is worth two in the bush.

Pay off mortgage. The £100k isn't going to go very far on school fees for multiple children but if you can Knuckle down and pay off the mortgage that monthly saving will pay your school fees.

I would probably go for school fees unless you only took on these mortgages in expectation of this inheritance and can't really afford them. If you aren't struggling to make the mortgage payments then you don't really need to put the money there and it will do more good being invested in your child's education.

There might be technically a way to do both if you are disciplined about it.

You would probably need to wait till your mortgage arrangement is next up for renewal. At that point, work out what the repayments will be if you keep the £100k for school fees (eg 650k over 25 years at 1.99% would be £2752) and what the repayments would be if you put in the £100k to reduce the amount but kept the loan term to the same number of years (eg 550k over 25 years at 1.99% would be £2,329). Now - if the difference between those two monthly amounts was put into a savings account, and assuming your baby is no more than 18 months, then over the next 16.5 years that is £83,754 - enough to pay for private school fees at least for the critical age 11-16 years - and if you can manage to save more than this you can probable eke out a couple more years worth too.

100k in itself won't be enough to pay for one child, especially with low interest rates, do you plan more? Short term use it to reduce your outgoings. Agree with those who suggest paying down mortgage (there may be maximum annual limits) starting with that on higher interest. That may "release" income longer term which you could set aside to either pay down the other or for school fees.

You need to invest the money one way or another, so plan in those terms. Mortgage almost certainly the way to do it.

Save the money until DC are school aged. You might be fine with your local school or you might hate it and find the cuts to school budgets mean you'd rather go private. I'd keep my options open until DC are in school by saving/investing the money.

look on it as if you save the £100k the interest would be negligible but if you pay down say your btl mortgage then you are saving substantially each month and still have the £100k equity in the property.

Agree even if you left it till senior school £100k would be tight to pay for private school

We had this same dilemma around 12 years ago. We paid off the mortgage and then used our extra available money to pay for school fees. However, as a pp said, your £100k will not go far. My DC boarding fees are £34k a year, my DC day school fees are £19.5k a year each... when you do your sums, make sure you account for the fact that school fees go up as children reach higher classes. Add to the fees above lots of extras such as exam fees, music lessons, sports equipment, hotel stays for matches etc.

Without a doubt, put it into the mortgage. You will save yourself vast amounts in interest andbe able to pay off your mortgage much more quickly, therefore freeing up big chunks of your income years earlier than you otherwise could have.

Having a big amount of money sitting in an account will do you little good and will definitely not accrue as much interest as you will save if you overpay on your mortgage (but look out for big fees if you overpay more than the permitted amount).

If you are confident in investing in stocks/shares, you might make a bigger return on your inheritance, but to me it's a no-brainer.

I know someone who went through University loan-free due to the income from the BTL bought in their name.

I thought that was widely considered to be a bad idea, as the vast majority of graduates will never pay off their student loan debt in full?

Hi all.

We are not able to have more children, so DC will always be an only child. I'm conscious that we will still need to top up and save for private school, if we kept the £100k for that, as it is not sufficient on its own. I can see that the mortgage is definitely a priority - but it felt quite pleasing to see a little pot of money ready and waiting for DC's future (if that makes any sense). I do understand that putting toward the mortgage will help in the long term though.

Thank you lovely MNetters - was really scared of posting this!

I thought that was widely considered to be a bad idea, as the vast majority of graduates will never pay off their student loan debt in full?

Yes, so they are paying 9% graduate tax forever.
What better gift than to give the DC a debt-free start in life. You effectively give them a 9% payrise.
But there's no point in doing this half-heartedly. It's either no loans or get the State to subsidise you pay the minimum and hope the balance is written off.

Martin Lewis advises considering it a "contribution" rather than a student debt, which is more than the people who introduced it ever paid.

No inheritance here but we've chosen to overpay the mortgage whilst the DC were young in order to have the choice of affording secondary school fees when the time came. We pay DC1's school fees out of income - they are equivalent to what our monthly mortgage payments used to be. Personally, I would pay down £100K off your mortgage debt. We had an offset mortgage and kept our savings pot separate to retain access/flexibility in case we needed it.

mortgage without a doubt.

I used mine to pay off the mortgage, it means that we can now easily afford for me to be a sahm. But i am lucky that there is a wonderful state primary just round the corner. I did consider sending them to private school but it would have meant that I'd have to return to work and dc1 settled into the local school so well and we're happy with her progress.

If you really want to start saving to have more money for school fees I'd say pay off the majority of the BTL mortgage (when it's up for renewal), and then clear the last £60k asap. Then the rental income can either go to lowering your main house repayments (lower repayments means more money freed up for private school) or start putting it in a savings pot (although interest rates are dismal)