Completely unexpected news

[TotallyShocked]

I have lived my whole life (almost 47) managing. Staying largely out of debt and with an ok income allowing for a bit of fun and some savings. My DH and I pay into a pension. It won't be massive and the state pension will be an important part of our pension planning.

I have always thought we'd receive NO inheritance. None.

This year my DH received £30,000 and I will receive £125,000. We had to spend £12,000 on a car but are saving each month to "put that back" if you like. I could also scrape together another £8,000 from various pots and "fuck off funds" (I'd rather not)

The inheritances equal a possible life changing amount of money for us.

We have 20 years and £138,000 left on our mortgage. It's a new mortgage so significant fees if we pay it off now. Maximum 10% over payment per year.

My dream has always been to be mortgage free BUT I also want to try and create "generational wealth" for my 2 DC.

We both have secure jobs for now, but that could change in an instant

Our new life insurance (for the mortgage) is going to be much more expensive due to age and health conditions (none serious)

What would be the best thing to do with this money?

At the moment I'm thinking we save/invest the money somehow and trickle the maximum 10% in each year as a one off over payment.

Is this sensible? Is there a better time of year to make a one off over payment?

We have one teenage DC at home and supporting another living out at Uni.

What should I do? We do have about £4,000 of debt but all of it interest free and the monthly repayments are manageable.

We had no summer holiday this year as we decided to use our holiday budget to do home improvements.

Double check your mortgage conditions - there may be fees for paying it off early now, but that's likely to be for a limited amount of time. After 2 years or 5 years (or whatever), there will probably be no fee for paying it off early. In which case you could plan to do this, if that's what you want to do.

My other thought is that you should probably stick the maximum amount you can into ISAs this year. I think it's £20,000 per adult per tax year. You have got several months left of this tax year to do that in, so no great rush. If you want to invest money, then it makes sense to use ISAs where you can.

I would not pay off debt which is interest free.

I am not an expert and it would probably be a good idea to consult a financial adviser. Please be aware that literally anyone can call themselves a "financial adviser"! Somebody who is an "independent financial adviser" is probably a better bet (look at unbiased.co.uk).

No one can tell your for sure what the right thing to do is but here's a few things to consider....

Mathematically, the thing that will probably leave you with the most money is to invest this money tax-efficiently. That means In ISAs and pensions. But this assumes that you get a return on your money from investments that is greater than the interest you're paying on your mortgage. A conservative estimate for investment returns might be 5%.

But - this would mean you'd have your money invested and it could lose value - especially in the short term. You'd need to be ready for that and not likely to get uncomfortable and pull you money out again.

You could put it in cash account instead, of course. However, in the long run, interest on cash accounts is likely to be quite close to the rate you pay on your mortgage - so no real advantage in doing so.

In terms of a financial adviser - this will cost and you may not get the value back from the advice. But if it make you feel more comfortable then it can still be worth it. (Don't use St James Place - far too expensive).

I would factor in the cost of interest over however long the locked in period is on the mortgage vs the cost of paying it off now. If you are locked in for 10 years you will pay a significant amount of interest, if you pay the mortgage off now you will not only save the interest but the capital repayment and you can divert those funds to work for you in whatever way you see fit, increased pension contributions, ISAs etc.

If you can tell me how long the locked in period is and what the penalty is (presumably a sliding scale) I can work it out for you. Also are you basic/higher rate tax payers? (this is to compare savings vs paying off mortgage)

I am also not an expert but I have an interest in this and am always up for working it out! You should consult an IFA, but it's good to go armed with some knowledge upfront

I would factor in the cost of interest over however long the locked in period is on the mortgage vs the cost of paying it off now.

This.

I had a colleague who paid off as much as he could and then spent a few years paying about £5 a month so he didn't completely clear the mortgage to incur the early redemption fees, but he was essentially mortgage-free as far as outgoings went. If you're limited to overpaying by 10%, that may not be an option, but it's worth looking at.

I don't think I would bother with a Financial Advisor, it's a goodly sum but not a crazy one and possibly not worth the amount they charge.

I think your plan sounds pretty sensible. Pay off the mortgage in the 10% chunks - make sure you save the difference when the payments go down or reduce the term if you can do that without penalty- and open max ISAs so £20k each. Put the rest in a decent interest savings account - Chase is good.

I would also consider your pensions and if it's worth trying to put anything into AVCs or putting more of salary into pension. Building your retirement on state pension means you're tied into retiring at 68, which may not be feasible particularly if you have some health conditions.

Have a look at the Meaningful Money podcasts and/or the Rebel Finance School

Both are free and will teach you the basics of how to manage money and grow wealth, and help you find tge best answers to those questions for you and your family.

Invest the money short term (premium bonds and Isas) and overpay the mortgage by the allowed 10% a year. When your fixed period runs out pay off the remaining mortgage. Invest the money you used to use for the mortgage each month into longer term investments.

I don't think I would bother with a Financial Advisor, it's a goodly sum but not a crazy one and possibly not worth the amount they charge.

In my former workplace, I could access a financial advisor for nothing (to me) through my workplace employee assistance programme - that could be an option, depending on where you work.

One more thing from reading your OP is if you have enough in savings to clear the mortgage at any point, then do you actually need life insurance to cover it, particularly if it's going to be pretty expensive?

What is the interest rate on the mortgage and what is the best interest rate you can get on your savings. If you can get a higher rate on your savings (or even the same) it may not be worth paying off the mortgage just save the money in a high rate account (ISA if that makes tax sense). It's nice to have a fair bit of cash in accessible savings.

Find out how much the penalty is for paying off early. It may be less than the life insurance costs?

An IFA will provably set you back about £1000 + VAT for a review of your joint finances, something like 0.5% or more annually for 'wealth' management (so probably don't do that) having just looked into this.
It sounds like you are thinking along the right lines in terms of pros and cons so continue doing research, the website Restless is quite good for thinking about pensions/investments.
Regarding your DC, look at Lifetime ISAs for pension/house deposits. Put some money aside for driving lessons as that can be pricey.
We had a life changing amount and went on a family holiday to Thailand costing about £12000 all in with Explore.

my Budget ap YNAB has a really useful mortgage overpayment calculator - I can fiddle around with it and see how much better off I would be by making overpayments etc. You can do a 35 day free trial of YNAB or find similar software online and play around with it. Using this calculator helped me decide to pay £2000 to end my previous "fix" early and get a new 5 year fix mortgage at 1.34% just before the interst rates went up - that decision has saved me thousands of pounds already. So look at those figures!

I'm 56 - in your situation I would be paying off my mortgage as soon as the fix was over (I'm on very low rate for now) with the repayment sum in the best interest rate paying account I could find until needed.

Once you are no longer paying the mortgate make sure you deploy the sums you were paying to the mortgage wisely - build up ISA's every year, investments for DC etc.

and I'd go on that lovely holiday - my DC are teens and its shocking how quickly they are growing away from me as a parent. All healthy and normal, but every holiday we get together at this stage is precious - they will be off on holiday with their mates and not me before too long.

Vanguard is a highly reputable, relatively low cost firm if you decide to do ISAs. And they have life strategy funds that make it easy to select investments.

Agree with pp, first thoroughly check your mortgage payoff terms.

I hope I'm answering all the questions

New mortgage just started 4.11%

Penalties for paying off for 5 years (it's a 5 year fix) the penalty decreases every year. Can't remember the amounts but with Halifax.

We live in Scotland so pay higher tax anyway. DH just in the higher tax bracket. I'm not.

ISAS maxed out for this FY due to DHs inheritance.

I haven't yet received mine - could be six months.

That's a good idea to maybe not bother with the life insurance.

We both have death in service benefits with employers so could pay off mortgage with funds and have money left over anyway.

Check what the life insurance covers - a friend has dome which covers carehome fees - that's probably an add-on, though.

I asked ChatGP based on mortgage of £130,000 (didn't want to give it exact!)

After 5 years making the maximum 10% one off overpayment

Our mortgage balance would be £55,601 and we'd have paid £46,361.09 in one off overpayments and roughly £48,000 on regular monthly payments. (ChatGPT advance data analysis failed at that point. Oops)

If we make our money work for us we could pay it off in 5 years? Does that seem sensible?

Hi OP
It depends on what the penalty amounts are. Check that and see if that leaves you better or worse off after 5 years.

James Shack (FA on YouTube) has just done a video in the best order to invest your money. Would recommend checking that out as there are a few steps before overpaying mortgage.

Go on holiday.

OK, firstly don't rely on death in service, it very often doesn't pay out as you have to be employed when you die, if you get a long term illness you will likely not be working for the employer still.

So I've made a couple of assumptions here given you don't know the figures, but assuming you pay 5% to redeem your mortgage you will have to pay £6,900. However you will save £64,000 in interest.

£138,000 repayment mortgage at your rate over 20 years is approx £840 per month repayment, total paid will be £202,000.

So you can see you will be quids in if you repay the mortgage as not only will you save £57k in interest (once you have factored in the £6,900) , but you will have an additional £840 a month which you can then invest as you see fit.

However, you won't have the savings. Interest rates are coming down, if you could get the lump sum into something with a good rate right now you could potentially be quids in if later on you remortgage with a lower rate. It is much harder to calculate how much your savings might be as rates will fluctuate, if for eg you invested £138k @ 5% after 10 years you would have £227,443.20, however you won't find a product which will guarantee that rate, NS&I currently offer 3.9% fixed for 5 years, you couldn't put it all in as you would need to keep money for the 10 % repayments during those 5 years.

If you paid off the mortgage in full and invested the £840 a month you would likely be better off, as at the end of 10 years you would have no mortgage (obv) and you would have saved 100k + compounded interest (which will depend on rates)

Comparing the two in an incredibly crude and broad brush way (as who knows what will happen with rates, what your returns might be on savings etc) and only looking at saving it all or paying off the mortgage in full as the calculation for doing it gradually will be very complicated. I have assumed a savings interest rate of 3% avg over 10 years as you may get 4% for 5 years and a lot less for the following 5 years!

Pay off mortgage now
Saving in interest - 64k
Savings balance after 10 years x £840 per month - 112k
Redemption cost - 6.9k
Total benefit to you £169k

Saving the 138k and continuing to pay mortgage
Savings balance after 10 years - 185k
Mortgage balance after 10 years - 82k
Total of Mortgage payments over 10 years - 100k
Total benefit to you £ 18k

A financial advisor would model the various scenarios for you in a much more nuanced way, but they could only make assumptions about rates etc.

I have done this rather fast so apologies if I have something wrong, it's not meant to give you answers, more to demonstrate what different approaches might result in.

Other things like putting the money in a pension would give you more money in the long run, but you would have to decide on that obv.

It's nice to be mortgage free, but it's also nice to have savings and pensions! T

It might be worth speaking to an independent financial adviser and asking them for advice on the best options for you. They will charge a fee for the service, but it could be well worth it in the long run.

Excellent analysis, @OldieButBaddie

However I am curious as to why your assumptions for investing didn't include stock market funds, which would tend to have higher rates of return.

Depending on OP's age of course. OP, what is your age and when do you hope to retire?

Obv they can invest in any way they want, but I figured that they wanted the money safe and may need in the relatively short term. Longer term it would be better in a pension given your dh is a higher rate tax payer (though obv this may change in the budget)

Could your DH now afford to up his pension contributions to get below the higher tax rate?

Other thing you could do for your kids is open a LISA each for them. Pay in upto £4k per year and govt will pay in 25% extra on top - so £1k if you put in £4k
It can only be used for buying first house or putting into their pension but a good option for tax beneficial savings for them

I was thinking this too @TotallyShocked . Is it a whole life policy or is it a reducing term policy to simply cover the Mortgage that would need to be paid off if something happened? The latter one is cheaper and if that is what you are going for, it is worth at least thinking about whether to take it out or not, even if you decide to stick with it.

I too think you probably need an independent financial advisor, who will charge a fee, but would almost certainly be worth it