Martin Lewis on how inheritance money should be used – ‘look at your mortgage rate’
Martin Lewis took questions from savers with varying issues recently and one woman asked the Money Saving Expert for his views on inheritances. Tracy explained she wasn’t sure if she should prioritise mortgage payments or other concerns.
Tracy detailed her mum died last year and she inherited £80,000.
She asked for advice on whether she should try and save it, invest it or pay off some of her mortgage.
She detailed she was three years into a 2.19 percent fixed rate mortgage with a cancellation fee of £3,000 and it was this final element that caught Martin’s attention.
Martin responded: “Until the very last word you said, the cancellation fee of £3,000, It was exactly the same answer as the caller earlier when we were talking about overpaying your mortgage.
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“Look at your mortgage rate, if your mortgage rate is more than you can earn in savings, pay off the mortgage.
“There are two caveats to that, it’s actually useful we’ve got this question so I can say them to everybody else.
“The first thing is, are you allowed to overpay without penalties? Most mortgages allow you to overpay up to 10 percent without penalties, you say there’s a cancellation fee, I would just check whether that cancellation fee applies for clearing the mortgage, or if you were just to make overpayments would you be allowed to overpay.
“There are calculators online that can do the numbers for you, without knowing the exact details I can’t do it, but generally it won’t be worth overpaying the mortgage so you should just be putting it in savings or investing, which is where you take a risk and you’re prepared to lose some of the money.”
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Martin concluded: “The other caveat to overpaying your mortgage which is important to remember is, I would always keep up to six months worth of bills and expenditure in a cash savings account, so that you’ve got that available as an emergency fund.
“So if you were to lose your job, the fact you’ve been overpaying the mortgage wouldn’t stop them putting you in arrears, so you want to have that cash emergency fund put aside.
“The first thing I’d look at is paying off your mortgage because it’s risk free and tends to work really well, but do check whether that cancellation fee would apply if you overpaid, rather than if you cancel.”
On mortgage overpayments, the Money Advice Service advises homeowners should ask themselves a number of questions before taking any action.
It explained: “If you overpay your mortgage it doesn’t just mean you have less to pay in future years, it might mean that you can pay your mortgage off sooner – sometimes even years earlier.
“On a £150,000 mortgage at five percent with 25 years remaining, paying off a £5,000 lump sum reduces the interest by £11,500 and means you repay 18 months earlier.
“Overpaying when interest rates are low means you’ll have a smaller mortgage to be charged the higher interest on.”
To see if overpayments would be beneficial, mortgage holders can utilise a number of free-to-use overpayment calculators found online.
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