Should I pay off my mortgage with my inheritance?

MORTGAGE rates are the highest they’ve been for years. And with the interest rates currently at 4.5%¹ you might be wondering if now’s the time to pay off your mortgage, or even reduce it significantly. Especially if you’ve received a lump sum in the form of an inheritance. 

The case for paying down or paying off your mortgage

Paying your mortgage off - Your home is almost certainly going to be the most expensive purchase you’ll make in your lifetime. And because mortgages tend to be large loans that last a couple of decades or longer, you could save thousands of pounds in mortgage repayments by paying your mortgage off.

Paying more towards your mortgage or paying down your mortgage - by paying more than the agreed amount, your total mortgage will be less so you’ll pay less interest. And as the balance reduces more quickly, it’s likely you’ll be able to pay your mortgage off sooner. If you need to remortgage in that time - as the amount you owe reduces - your loan to valuation rate will be lower, which means you may be able to negotiate a better mortgage rate. All of which means you’ll save significant sums in the long run. 

Are there any pitfalls to paying your mortgage off early?

Maybe the term pitfall is a little strong, but there are definitely things you should consider. Before leaping into a mortgage-free world, ask yourself the following:

• Are there penalties for paying off your mortgage? Know what you’re getting into. Your mortgage may have an annual overpayment allowance. Anything over and above that is likely to incur an early repayment charge. You should think about whether the pros for paying your mortgage off early outweigh the cons.
   
• Do you have any money set aside for emergencies? If you don’t have three to six months of savings set aside for emergencies, you should factor this in before paying extra off on your mortgage. Then if you’re hit with an unexpected bill, you won’t have to borrow money unnecessarily.
   
• Do you have other expensive debts to pay off? Loans, credit cards and overdrafts often have higher interest rates than a mortgage. It probably makes sense to pay these off before paying down your mortgage.
   
• Are there any other upcoming large costs you need to think about? Perhaps you’ve dependants - whether that’s elderly parents or children - who are relying on you financially as well as emotionally. It’s worth ringfencing some cash for their needs to ensure you don’t struggle further down the line.
   
• How secure is your job? Little in life is certain, so you may want a buffer in case you find yourself between jobs. 

Do you want your inheritance to work harder for you?

There are lots of good reasons for completely paying off your mortgage. But if you’re looking to make your inheritance work harder for you, paying off some of your mortgage with it and investing the balance might be something you could consider. Interest rates may work for savers at the moment, but with inflation still in double figures, the real value of any cash will decrease over time. Investing your inheritance for the long term gives it the potential to grow. Although it could fall in value too.

Source:

¹ Bank of England, Monetary Policy Summary, May 2023