What to do with 200k

[loyganroyal]

This is a very first world problem, so sorry in advance.
We’ve sold a flat and now have enough money to pay off our mortgage.
Our fixed rate ends Jan 2026, so I’m thinking make the maximum early repayment now (about 40k) and wait until the end of the fixed term to pay off the rest (about 200k).
We would have considered buying a bigger house, but with mortgages the way they are now, think we prefer to pay it off and be done with it!
So what would we do with the 200k until then?

Safest place is all in National Savings in whatever pays the best rate of interest.

In other institutions there is a maximum of 85k that is fully protected (if the bank/building society went bust). So it needs spreading around.

You may need to pay tax on the interest.

Also one ISA per year each, max of £20k in that and the interest is tax free.

Make sure it's not locked up when you will need it.

You need the 40k to be available when you are ready but it can earn interest in the meantime.

With 2.5 years horizon and a plan to use money to clear the mortgage there is not much you can do other than stick the whole amount into savings.

Two year fixes would give you the best rates over the period. Even though one year fixes are paying higher, rates are probably falling next year so you won't be able to fix again at the same rate. So unless you have other plan to use the money in a year's time, then go for two year fixed saving.

If you were a member of Nationwide in May they have a 4.75% bond, fixed for two years (offer runs out soon though), and you can't take your money out within 2 years. I would think other building societies have something similar.

Premium bonds?

What’s the interest rate on your mortgage?

There are some decent returns on easy access accounts (typically over 3%) and even better if you fix for a period of time. So if your mortgage rate is low it might be better to keep it in savings and pay off at the end. But if it’s a big sum you might be liable to pay tax on your interest earnings over a certain limit.

Using your full ISA allowances (assume there’s two of you?) shelters £40k of that money in this tax year and then you can do another £40k next year (and so on) between you assuming the ISA limits remain unchanged.

You can also hold £50k per person In premium bonds. The winnings are tax free.

Once you start being liable to pay tax on interest you need to do the sums to determine where it’s best to hold it.

It all depends on the amount you have, and whether or not you and your DP are basic or higher rate taxpayers. A lot depends on your circumstances.

Two full holdings in premium bonds (winnings tax free) 20k each in a fixed rate cash Isa, hold the rest in best easy access savings until April and put another 20k each in isas, this will save you paying tax on any interest. On 200k you should make at least 4-6k in interest over the next couple of years.

I'd lock it in savings if the savings interest is greater than the mortgage rate and pay it off at the end of the fixed term.

If you have a low interest like 1% on your moertgage don't pay any of it off early, put all the money in a bond or high interest account

@Cottipus thanks! The mortgage rate is 2.15 percent - checked today and we can pay 45k off now with no fee. I pay 40 percent tax, DP self employed, it varies.