Should I use inheritance to overpay mortgage or build savings?

[thetownofshap]

I bought my first house last year and owe £130k at an interest rate of 4.45%. I have recently inherited £20k. Am I better saving this money in an ISA or overpaying on my mortgage? I don't have any savings otherwise and I'm solely responsible for paying the mortgage, although I do have income protection insurance.

I would put it into an isa. You cannot buy the peace of mind that having savings gives you. Reducing your mortgage is no good if you can't make the payments due to a change of circumstances.

If you have no other savings I would definitely put this money in an ISA.

The usual advice is to make sure you have some emergency savings put aside in case things go pear shaped. 3-6 months of your usual expenses would be good, and a Cash ISA is an ideal way to do this (make sure it allows easy access).

If you have money in excess of that you might want to think about either saving for specific purchases or, if you think you might not need that money for several years, you could consider investing it. Over the longer term, investments ought to make you more money than you would save by putting the money towards your mortgage. This isn’t guaranteed though, and you have to understand and be comfortable with things like volatility and risk (basically, your investment might suddenly lose value, and that would be a terrible time to either panic and or sell up!).

If you have your emergency fund, no need to use the money for specific purchases and you’re not comfortable with investing then it might be worth putting some money into your mortgage.

That’s my feeling anyway!

Best financial sense since you have no savings:

£10k in an easy access savings account or cash isa. Doesn't matter which (you won't pay tax on interest on £10k assuming you're a basic rate taxpayer), find the highest interest rate you can. Make sure you can access the money when you need to. This is your emergency fund, so you don't go into debt if your car needs £2k worth of repairs or your freezer stops working etc. If you dip into this work on building it back up ASAP

Then I'd put the other £10k in a S+S ISA choose an all world index fund to invest in. Don't touch this money for at least 10 years. You could reasonably expect it to be worth £22k in ten years time (assuming 8% growth which is what historic data averages)
If investing feels scary take some time to improve your financial literacy before you decide against it. In ten years you have choices - keep it invested, or take some out to pay a chunk off your mortgage then. Watch out for overpayment fees though.

This approach gives you more flexibility for shit hitting the fan in the future - once you pay money into your house, it's tied up

I would spend a chunk of it on a lovely holiday. I would hate to think of the beneficiaries of my will putting it all away in savings or paying off mortgages, and have specified that the bequests Ive left for a couple of my friends should be enjoyed and spent on frivolous things for themselves that they could never possibly afford.

Most mortgages won’t allow you to overpay more than 10% a year anyway.

But I would put it in a S&S ISA anyway

I would save your inheritance as suggested by PPs but try to work on making some regular savings or build in a regular monthly overpayment on your mortgage. Check your T&Cs on your mortgage first - if you are on a fixed rate deal there may be limits for how much you can overpay.

As your mtg is at the early stages, any overpayments made now will reduce your total interest significantly and depending on how you arrange the overpayment with your provider, could end up reducing your mortgage term.

I think that is a lovely idea in theory, but if you were in a financially precarious situation and suddenly received some money, imagine being told you had no choice but to blow it all on some “fun”! I would feel sick seeing my chance of security disappear while I had to grin and pretend to enjoy blowing it all on a holiday of a lifetime!

I don't think it's fair to stipulate what an inheritance should be spent on - you're trying to control other people from beyond the grave!

Financial security gives many people more happiness than a holiday.

Trust people to live their own lives.

it's not a one or another type thing. you can do both pay off chunk and save chunk.
and please include a nice little something in memory of the person who you inherited from.

£3K on a holiday and the rest in an easily accessible ISA or savings account. Also, start getting into the habit of saving every month on the day you get paid.

Do all three of the suggestions above - save 5k in an easy access savings account, another chunk in an ISA you don't touch for years, then a small amount on a holiday.

If you have no savings then I would definitely prioritise putting a minimum of 3 months expenses (preferably 6) away in an easy access account. I use Premium Bonds for my emergency fund so I could get the money quickly if the car blew up or whatever but in the meantime I may win something....you never know.

Then think about long term savings in a Stocks and Shares ISA. I use one of the robo advisors (e.g. Wealthify, J.P Morgan Personal Investing etc) as I wasn't sure what I was doing at first and it made it really simple for me. Work out if there's a chunk of money you can put in there and leave it for at least 5 to 10 years, and add small amounts to it if you can. I started mine with a lump sum of £5k and then committed to paying £50 a month in....that was in 2020 and I've slowly increased payments over the years. It is doing really well and has made far more money than I'd have got anywhere else.

If you want to spend a bit to remember your loved one then go ahead, but I'd prioritise the savings first. I bought a lifetime membership to the National Trust with my smallish inheritance which will pay for days out for the rest of my life.....every time I use it I say "thank you Nan!"

The friends concerned have never had the money to treat themselves to anything. My closest friend has always been short of money since I first met her nearly 50 years ago and hasn’t bought anything frivolous for herself in as long as I can remember. She’s no better or worse off since she retired and will always have enough to struggle by - she would be thrilled to have some money left to her that she could spend on herself without feeling guilty about it.

10 k into a high interest instant access cash isa so you can access cash if needed
10k into a S&S ISA, leave for at least 5 years. Add to if and when you can in following years when allowance is renewed