Mortgage/investment

[Lozzalou9191]

My husband and I have come into some money recently. A sum significant enough to clear our mortgage- around £200k.
Through overpayment, we have used up our free overpayment allowance for this year (renews in January) and we still have 4 years left on our current deal so we would be charged if we overpaid further this year.
We’re unsure what to do with this money. My husband wants to clear the mortgage ASAP (we would have to pay around £8k in early repayment charges if we did this before 2024). Money isn’t extremely tight, but with a young family an extra £850 disposable income a month would be awesome.
My thoughts are that we could put the money in ISA’s/premium bonds, then pay the mortgage off once the current deal is up without paying any charges and hopefully earn some interest on it.
DH says that it’s like for like and that interest paid on the mortgage over the next 4 years will equate to what we’d pay in early repayment charges so it’s a non-issue. Our interest rate at the mortgage is 1.48%.
Any advice on what we should do with the money! Understand we’re in a very lucky situation and just don’t want to make bad choices!

We’re mid 30’s if that makes a difference and our jobs are stable!

I think your DH is right, I would pay off the mortgage now.

I would look at investing some of it personally & work out which will make your money work better for you.

Have you worked out exactly how much interest you would pay before your deal runs out? You could maybe ask the bank if you can’t figure it out alone. I’d also then factor in how much interest you could make investing.

1.48% isn’t a bad mortgage deal though. I’d be inclined to overpay the maximum amount each year until your deal ends and then clear it. Unless you want rye going to be charged more than £8k in interest

There are calculators out there that can work out if it's worth paying the early repayment charge. Gut feeling for you is that it's not.

You can get a fixed rate savings account for 1-3 year over 1% interest now I think, which nearly covers the interest charged on your mortgage.

I'd put a big chunk of it in the best fixed rate account that I could find for a couple of years, and maybe some in premium bonds, because if you buy £30-50k, you should average around 0.8% or more so more than instant access but maybe not as much as a fixed rate account and you could do a lot better - I've earned between 2 and 6% return on PBs over the last couple of years, but that's above average luck.

You could free yourself from having to make mortgage payments by dripping the mortgage payment out of savings each month, You just need £50k in an instant access account that allows you to withdraw the money to your current account to make the payment, if you can't set up a DD straight to your mortgage.

Congrats, that’s a great position to be in. Google “Dave Ramsay’s Baby Steps” and see which steps you could tick off with the money. Look into whether you could save tax on the money by putting it straight into a pension (I know with a young family you’d probably prefer to have it to hand, but the tax savings could be significant). I don’t know a lot about this though so maybe an accountant / FA can chime in on that point.

Thanks so much for your advice! We have our emergency savings etc, so really we are up to Dave Ramsey’s pay off our mortgage step 😳
Having spoken to the bank, they have said we pay £260 a month on average in interest. I’ve multiplied that by the amount of repayments we’ve got left until deal runs out (48) and it comes to £12k roughly. I assume this is the kind of calculation I should be doing?! Therefore I’m guessing we’re better off paying the £8k ERC?

Me personally I would rather £200k spread across a range of investments and savings accounts, as opposed to being tied up in an illiquid property, expecially given your very low mortgage rate. I appreciate everyone if different, however I would begrudge paying £8k ERC's on a mortgage that is as low as one can get.

Me personally it would be spread across
Premium Bonds
S&S ISA - In a low cost fund such as Vanguard
Some Crypto
and also look at pension contributions.
Make the maximum annual overpayment on the mortgage without charge.

You could buy £20,000 worth of shares in 10 of the top dividend paying companies instead.
If you got 5% divi from each company you’d get £10,000 a year AND still have the original £200k.

How much can you overpay each year without penalty? That should be the figured in to work out your potential interest over the next 4 years, as if you overpay the interest will be less than that.

I'd pay off the mortgage in a heartbeat. Then use what you've saved in mortgage payments to increase pension savings or look at other types of investments.

Having spoken to the bank, they have said we pay £260 a month on average in interest. I’ve multiplied that by the amount of repayments we’ve got left until deal runs out (48) and it comes to £12k roughly. I assume this is the kind of calculation I should be doing?! Therefore I’m guessing we’re better off paying the £8k ERC

Don't forget that if you don't pay it off, you'll have £200k that you can invest or put in a savings account etc.

If you put it in a fixed rate account paying 1% interest, you'll get about £180 pm interest, so if that's the case, you aren't better off paying the £8k penalty (at this level the interest would be taxable but you can avoid this by looking at ISAs, premium bonds and possibly splitting the money with your DH to maximize the personal savings allowance.

So you’d save £4K over four years if you paid of the mortgage early? So you only need to find an investment that gives you half a percent increase each year to beat that.

Even the safest lowest interest investment would beat that. Premium bonds, basic savings account… etc

@BarbaraofSeville

Having spoken to the bank, they have said we pay £260 a month on average in interest. I’ve multiplied that by the amount of repayments we’ve got left until deal runs out (48) and it comes to £12k roughly. I assume this is the kind of calculation I should be doing?! Therefore I’m guessing we’re better off paying the £8k ERC

Don't forget that if you don't pay it off, you'll have £200k that you can invest or put in a savings account etc.

If you put it in a fixed rate account paying 1% interest, you'll get about £180 pm interest, so if that's the case, you aren't better off paying the £8k penalty (at this level the interest would be taxable but you can avoid this by looking at ISAs, premium bonds and possibly splitting the money with your DH to maximize the personal savings allowance.

200,000 at 1% interest would leave the op with £208120 after the 4 years. That’s £4K more than she’d have if she paid of her mortgage (£12 saved £8 repayment fees?)

If you don't need the money now, then invest it for the long term. I can see the attraction of paying off the mortgage, but at rates that low, it makes more financial sense to invest it.

If you put £100k each in to a FTSE tracker that pays around 4% a year, so £8k combined dividends £4k of that is tax free, so you only pay tax on the remaining £4k, so £800 if you are both basic rate tax payers, less, if one of you is a non tax-payer, or earns below the personal allowance. Use the dividend income to fund the annual overpayments, and then pay off the mortgage after 5 years if it makes sense to. You will be risking your capital, but if you look at a 10 year timeframe, that shouldn't be a problem

Also, you should have a 6 month cash fund, for emergencies.

Good article here about why not to pay off your mortgage early:

monevator.com/not-paying-off-my-mortgage/

@Lozzalou9191
Can you ask the bank to reduce the term to eg 1 year so you don’t pay penalty fees? I’m sure this is what exDh arranged when he had a large bonus, he reduced the term for a while and then increased it again. At least I think that’s what happened.

Hi there, I am looking for some financial advice. I am 40 years old and live in England. I currently own a house with a market value of £550,000. I have a mortgage for £140,000 so we are quite comfortable. Now, my business is doing well and last year I paid approx. £400,000 net profit through my LTD company.

I am a person who usually likes to play it safe, so I was thinking of just staying where I am and paying down my mortgage and using any surplus profit to buy BTL properties through my LTD company. So, when I retire (in 20 years) I would have a decent portfolio of BLT to live comfortably.

However, part of me is saying "enjoy life" and I am contemplating the idea of instead of buying BLT properties, I could just upgrade my current house and buy a house with more land etc for approx. £800,000. I am from a working-class background, so the idea of a £800,000 house is quite scary (what if I lose my business etc). But my idea would be to live in the £800,000 house for 20 years and sell it when I retire to then use the money to buy a smaller house for myself and a couple of BTL properties for my retirement plan.

What would be best financially (with potential growth in house prices) and is it worth buying a bigger house now (and potentially having a better lifestyle for the next 20 years). or playing it safe and stay where I am and buy some BLT properties.

Any ideas or advice would be great.

thanks

@MS1981 If you want more people to see your post, copy & paste it and click ‘start a new thread’ - then your question will be seen by more people and you’ll show up as the original poster in replies too.

The limited company through which to buy would need to be a special purpose vehicle. It will do nothing but own the property(ies). It’s important to get advice on the pros and cons of SPVs from a qualified accountant (and potentially a mortgage adviser).
Also, you say you paid net profit - do you mean you paid yourself dividends?