Mortgages, small payout, reducing monthly outgoings.

[SeriouslyCluelessSally]

I have 2 mortgages.
one for just under £20k one for £41k both with 13.5 years left both with interest of 2.19% fixed until 2026.

I am about to receive £25k.
I urgently need to reduce my monthly payments to as low as possible so, my question is, is it better to take the penalties and pay £25k off the larger portion so my monthly payments are less?
I know I could pay the small one off totally and pay £5k to the smaller one, but I would then still be paying a larger amount each month (I am aware it is low, but I earn low and am now solely responsible for this mortgage).
As it stands, to pay the larger amount, council tax, utilities etc I don’t have anything left for food or car fuel. I have no clue what the penalties for paying £25k off the larger one would be either.
My brain is frazzled and I can’t speak to the mortgage people until tomorrow so was hoping someone with some knowledge could give me some guidance today.
Thank you.

Pay off the maximum you're allowed to penalty free, either reducing the term or the monthly repayment, whichever suits you best. Then maybe drip feed yourself £100 a month to help woth budget and pay maximum off again next year, repeat.

Came to say the same thing as above. Don’t pay penalties, pay the max you can without incurring fees and use a small amount each month from the pot to top until 2026 when you can pay off another chunk.

Chain check the penalty's. You don't want to be paying out when you don't have to

I would pay off the smaller mortgage then extend the term of the larger one.

Usually it’s 10% off the total remaining so 2k and 4.1k pay off.

Put the remaining in a high interest account.

Pay more off in 2026.

Why not use the lump to take over the monthly payments instead, increased by whatever the penalty free overpayment would be (usually 10%). Make sure you pay to one side whatever you would normally pay, which will give you that amount plus anything left from the 25k to chuck at the balance when the fixed terms end. This way you will be incurring no penalties, and building up a bit of interest on the savings (both the lump sum and your monthly put aside).

I like @enjoyingscience 's suggestion.

My quick calculations suggest that if you paid the mortgage each month for the next two years out of the lump sum, you'd still have around half of the money left in two years, so you could throw the rest of it at the smaller mortgage.

Is there anything you can do in the meantime to increase your income?

Avoid ERC (Early Redemption Charge) and avoid remortgaging fees.

Find out how much you can pay without penalty, during each yearly period.

Towards end of the fixed term, talk to broker about remortgaging costs, based on repaying the smaller mortgage in full, vs remortgaging both into one and paying monthly payments on that. By that time the amount owed may be fairly small in mortgage lenders terms, so choice of lenders may be limited.
The mortgage interest rate at that time may be double what you are on now, so keep some money back for helping to pay the monthly payments.

Pay off any other debts. Have an emergency fund. Use some of the money as a buffer to stop you taking out debt if something unexpected happens.

Paying off a mortgage puts money into an illiquid asset - hard to sell, slow to sell.
Keep some money liquid so if you lost you job (as an example) you can still make the mortgage payments.

I agree with @Pegasusforme pay 10% off both ( or the maximum you can without penalty but it’s often 10%) then put the rest in a high interest savings account that allows easy access, like Chase for example. Then pay 10% off both mortgages again in a year’s time or as soon as they will allow.

Tell the lender you want to use the overpayment to reduce the monthly amount rather than reduce the term, as it appears reducing the payment is your top priority.

I urgently need to reduce the monthly payments.

Why? You have £25k coming in, so can easily pay the monthly payments.

What is the bigger picture... what is making it hard to afford the monthly mortgage payments now?

Is there anything you can do in the meantime to increase your income?
No, due to chronic health conditions I am limited health wise.

Why? You have £25k coming in, so can easily pay the monthly payments.
Only for 4 years. I wanted a longer term plan as I have lost my DP and we have a DC. There is really nothing I can downsize to, and rents are double my mortgage for a smaller property, so it doesn’t even make sense to sell.

thank you for all the suggestions, I’m acting in blind panic at the moment and didn’t know what to do for the best.

Stick the £25k in a high interest account (5%+)

Your mortgage rates are less than half of what you can get in interest, and it sounds like you aren't a higher rate tax payer so you have a £1,000 pa personal saving allowance and there would be very little tax on the interest earned (or use an ISA and no tax implications).

Use the interest & capital to help meet the mortgage payments.

Basically instead of paying the lump sum off the mortgage up front you are drip feeding it in, avoiding any early redemption charges and earning the difference in the interest rates on the remaining balance.

Don't panic @SeriouslyCluelessSally

Either pay 10% off both mortgages and then invest the rest of the money in a high interest account or put the whole lot in a high interest account and use the interest to help pay your mortgage each month. That is a good option financially but psychologically it feels great to reduce your mortgage balance a little and the lower balance will be helpful when your mortgage rate increases. It's personal choice which you choose to do but they are both good options.

Agree it makes no sense to sell but the 25k will really help you feel more on top of your finances once you get it.

Thank you.

Will having the money affect any benefits you claim? That might change answers.

Sorry you have it so tough.

Thank you Squishy
I do currently receive a small amount of UC. Once I receive the payment (although could be up to 16 weeks) I won’t be entitled to anything.