Inheritance - pay off mortgage or something else?

[33goingon64]

My Mum is terminally ill and I'm likely to inherit quite a lot of money as she was a very savvy investor and benefited from a public service pension as well as my Dad's estate. I realise some people might think it's poor taste to be thinking about what to do with the money while she is still alive but we're very practical and open in my family and she has encouraged us to start thinking about it.

DH has suggested we pay off the mortgage. For background, DH earns way more than me and pays all the mortgage, bills, for the cars etc. He has a fair amount saved. I work PT and pay for holidays, clothes, and other expenses etc and I have some savings in my name. The mortgage is in joint names and we have always treated our money as joint pot. He doesn't see his earned money as 'his'. We have 2 DC.

So his suggestion that we pay off the mortgage with my inheritance seems fair, doesn't it? He has, after all, been the one to get us so far through paying it off already. The house is in joint name, if we pay it off and then further down the line something went wrong and we split it doesn't disadvantage me at all if the house is paid for. My contribution to paying for the house would have been very small compared to his. The DC will both get a nice sum from my Mum too which we will invest for them and with luck over the next decade that might cover a fair bit of university fees or a first home deposit.

Yet I somehow feel like 'my' inheritance should be used for something else, like a holiday home, or to invest for something big later in life. I mean, I think I know that paying off the mortgage is the sensible thing as it frees us up for the future. But it's a big decision and I just want to stand back and consider it carefully. Would love to know what you think. Thanks.

Will you be inheriting cash or assets/shares etc? I would not rush to sell anything, would think about you holding your own portfolio of investments instead of pension. Retirement savings do not have to be invested via a pension.
I would also want the mortgage reduced if there was cash available but as others have said you should watch how you and DH spend the freed up mortgage payments.
Sorry about your mum

@BarbaraofSeville the high interest on current accounts is limited usually to about £2000 of your balance . The rest gets little or no interest. If you’ve got the time to open multiple accounts and fulfill all the direct debit conditions for each one then great, but most people are too busy for that.

OP this will tell you exactly what you’ll save. You’ll have equity in your house and the value of it it also likely to go up with time
www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

[quote Knownbyanothername]@BarbaraofSeville the high interest on current accounts is limited usually to about £2000 of your balance . The rest gets little or no interest. If you’ve got the time to open multiple accounts and fulfill all the direct debit conditions for each one then great, but most people are too busy for that.[/quote]
I think you misunderstand what Barbara is saying though, I don't think she was seriously recommending using current accounts as a saving strategy, more that even the small portion of your money you'd choose to leave in a current account could probably earn more interest than you'd save by paying the equivalent off your mortgage. There are a whole range of instant access cash ISAs, fixed rate ISAs, regular savers and fixed rate savers on the market all paying around 1-2% in interest rates, which is more than many people's mortgage interest rates. To me that's still not a great great choice for a large sum of money, I would recommend a managed investment fund, one that can be tailored to your risk appetite level (mine is set to low-medium and has consistently performed at over 5%) but each to their own - but it is worth understanding the sums before you simply pick an option because it 'feels' the best if you don't know much about money (no shame in that BTW but do take advice from someone who does!).

I don't necessarily think putting all your capital into repaying the mortgage is the 'safest'/least risky option if we are thinking about job loss/economic catastrophe either, obviously it secures your home but you then have all your eggs in one very illiquid basket, if for instance you suddenly needed a large sum of money to fund early retirement or medical treatment or a legal bill, you could be struggling to access the funds without selling your house, whereas if you'd kept a small affordable mortgage and invested the rest you could probably relatively easily remortgage to borrow more or sell out of investments with a few weeks notice. And in the unlikely event of a massive stock market/housing market crash it might well pay to have some very safe investments like government bonds or gold - a managed fund will do all this for you.

Not saying all the people who would go for the pay off the mortgage option are wrong, it all depends on your own circumstances of course but it's not totally black and white either...

It will depend on your mortgage interest rate vs investment return. My DH inherited from his mum and we have invested it because a) the rates are favourable (7% average return over the late 5 years vs 1.49% mortgage) and b) we are not great at general savings so wouldn’t necessarily save the whole mortgage payment every month.

We also bought ourselves new cars outright which saved us money on running costs for the old ones we have. Would that be a possibility!

I also think you should do something to treat yourselves. It has no doubt been a stressful time and we don’t often have the funds to do something completely frivolous so this might be your opportunity.

Lots of information on here for you to digest. However, why would you fix your money into an ISA at 2% below inflation, losing money in real terms.

I do not know the sum of money involved, however, I know it goes against MN generally, but if it is a large sum of money I would see independent financial advice.

Has this inheritance created an inheritance liabilty? Do you have sufficient carry forward to make a lump sum payment to your pension? What is you attitude to risk? WIll you be gifting to your children, and if so, and above your IHT allowance, will you be setting up a gift inter vivos policy to cover the PET liablity?

Please don't think this post is being facetious, however, if it is a life changing amount of money, I would rather spend £1,000 on a fully prepared financial plan with associated liablity protection from the FCA, than advice from a forum.

I appreciate it is just for ideas, but please don't take them all as seriously as others

Match his pension, match his savings. Do this first. As you’re practically minded, if you split up you need to make sure you have that security.

I never though I’d get divorced. I was married over 15 years. He’d always said we couldn’t afford to top up my pension, I didn’t realise he’d been happily topping up his. Which meant his pension at divorce was over 3x mine, and we both worked full time.

Fairs, fair.

Once that’s done then look at your mortgage. Although I would question why bills are split like they are. Much better if you have a joint account that pay goes into then each transfers an equal set amount to their own account each month.

It’s up to you what you do but if you pay off your mortgage then you have to address your bills and who pays what.

I paid off the mortgage as I also worked part time but DH has continued to give an amount that I am saving.
I have also bought a HMO property with a business partner and refurbing it to rent which will give a healthy return

Another idea for you OP, I set up (well my financial adviser did it for me) an investment ISA to help my DCs with university.

Perhaps it’s worth you (just you) speaking to a financial adviser and see what they recommend?

@SD1978

Is he paying off a good chunk of the mortgage, but you've said he has significant savings, he has a a good pension, to me that should be equaled out, so that your pension is decent and you have savings too. Despite him being the main earner, it doesn't mean you shouldn't also have some future financial plans.

Yes. And for sure those saying to pay off mortgage and then redirect the mortgage payments into her pension -- what if DH loses his job, becomes ill, dies or leaves? Then she is left with inadequate savings of her own.

Secure your old age first, with this windfall. You can't go back and do that over when it's too late.

@KosherDill - Fully agree, much easier to pull money out of a pension in later life, or an investment, or a savings account when in the need of money.
Once it is in the house, it is in, only way out is sale or re mortgage. Also, you are putting all your eggs in oen basket, what about a huge housing crash, all your money 'gone'. Extreme scenario, but as part of a full cash flow analysis, these things need to be considered.

[quote fromdownwest]@KosherDill - Fully agree, much easier to pull money out of a pension in later life, or an investment, or a savings account when in the need of money.
Once it is in the house, it is in, only way out is sale or re mortgage. Also, you are putting all your eggs in oen basket, what about a huge housing crash, all your money 'gone'. Extreme scenario, but as part of a full cash flow analysis, these things need to be considered.[/quote]

Good point about housing value crash.

Pension first. Mortgage rates are the lowest they've been in years.

I would spread the money. Pay off some of the mortgage off and leave some remaining so that it is easy to remortgage or raise capital if you want to extend, less hassle than reapplying.
Invest some in stocks and share ISA to take advantage of Tax free gains.
Look at your pension provision and put some away.
Think about transferring some to children and setting up an investment for college/ house deposits.
I would stay clear of Buy to let and Hoilday homes and both attract high capital gains tax and returns are not significant for the management required.

@Knownbyanothername

If you pay off the mortgage you can save potentially 10s of thousands of pounds in interest, that monthly money can be invested. Plus the value of you house is likely to go up with time too.

'Likely' to go up.

What if we have a post covid housing crash, ALL of your money is tied up in a depreciating asset.

Are these posts serious? If the housing market goes down, your mortgage remains the same, it doesn’t decrease if the value of the house goes down. That’s why so many people got into negative equity in the late 80s. If you pay off your mortgage you release tax free money every month to invest in your pension. Win/win.

@Blossomtoes

Are these posts serious? If the housing market goes down, your mortgage remains the same, it doesn’t decrease if the value of the house goes down. That’s why so many people got into negative equity in the late 80s. If you pay off your mortgage you release tax free money every month to invest in your pension. Win/win.

What if you pay off your mortgage then you have serious illness and need cash to replace an income. What if you want to move but can’t due to negative equity. Does your mortgage offer a 20% increase in your monthly contributions? Does your mortgage pass across as a tax free lump sum to your spouse on death to do as they please? Does your mortgage offer you a diversified investment portfolio, potentially tax free?

Before you berate others for their suggestions, please think through yours.

Paying the mortgage was the best thing for us because we both work full time. This protected us from any long term illness or redundancy because we could easily have managed on one wage so there wouldn't have needed any of the panic from those saying how would you release money etc. One wage with a big mortgage would have been very tough.

If you only have one earner then you will always have an extra issue of what happens if they cannot work but that should factor into planning finances irrespective of inheritance.

What if you pay off your mortgage then you have serious illness and need cash to replace an income. How do you pay your mortgage if that happens?
What if you want to move but can’t due to negative equity The same applies if you still have a mortgage.
Does your mortgage offer a 20% increase in your monthly contributions? No, that’s why I suggested paying it off and recycling the payments into your pension so you get the 20% tax benefit.
Does your mortgage pass across as a tax free lump sum to your spouse on death to do as they please? No it puts a roof over their head.
Does your mortgage offer you a diversified investment portfolio, potentially tax free? No it offers you a cost free home for as long as you need it.

Before you berate others for their suggestions, please think through yours I did, unlike you.

if your company pension allows you to purchase extra, then this would be a tax free option you could utilise . Pay your salary into your pension above £12500 and then paying yourself out of the lump sum would mean you'd save tax on the investment into a company pension.

I'm very sorry to hear about your mum. I would most definitely pay off the mortgage. It would free up so much money each month that you could then put in to a pension or save for amazing holidays etc. I don't think buying a holiday home is very ethical (sorry, I'm SUCH a bore!). It's not good for the locals who are left living with lots of empty houses around them - and do you really want to holiday in the same place all the time? But it's entirely up to you!

@ivykaty44

if your company pension allows you to purchase extra, then this would be a tax free option you could utilise . Pay your salary into your pension above £12500 and then paying yourself out of the lump sum would mean you'd save tax on the investment into a company pension.

This is similar to what I did and it has paid off handsomely.

I think it depends on what would happen to the normal monthly mortgage payment. If you pay off mortgage and the money saved ends up being frittered away then I think it’s better to keep the lump sum.

Please get some professional advice. Some of these responses are not good advice and you will need a proper analysis of your financial situation to get the advice you need.

@ivykaty44

if your company pension allows you to purchase extra, then this would be a tax free option you could utilise . Pay your salary into your pension above £12500 and then paying yourself out of the lump sum would mean you'd save tax on the investment into a company pension.

This isn’t correct. You get tax relief on all the money you pay into your pension, not just the salary above £12500.

There’s a calculator to work out how much you can pay in and what tax relief you get here: www.which.co.uk/money/pensions-and-retirement/pensions-retirement-calculators/pension-tax-relief-calculator-angp51p666u6

But if you want to do this it would be good to get professional advice first, as @anniegun suggests, to check you’ve worked things out properly. Pension Wise is free, paid for by the government, and they know what they’re talking about.