INVESTMENT CLINIC: I've inherited £50,000. Should I use it to overpay on my mortgage or to start investing?
I've recently inherited £50,000. Should I use it to overpay on my mortgage or to start investing?
K. B., Blackburn, Lancs.
Tough choice: Is it better to use a windfall to overpay your mortgage or to start investing?
Holly Black, of the Daily Mail, replies: The traditional advice when you have a large sum of money is to use it to get rid of any debt.
That means credit cards, loans and overdrafts - and it also means mortgages. But there are caveats when it comes to home loans.
It is very important that you check the terms of your mortgage before you make a large overpayment. Many providers will charge you for early repayments.
You are typically allowed to overpay by up to 10 per cent of the value of the loan each year without having to pay a penalty. But after this, you could be hit with fees as high as 10 per cent of the amount you overpay.
If you were charged on the entire sum you inherited, that means you would be handing £5,000 to the bank, which I am sure you really don't want to do.
It's also worth pointing out that this advice hails from a time when interest rates on mortgages were high - often in double digits.
If you are only paying 2 per cent or 3 per cent interest on your loan, then offloading it ahead of time is not quite so important because you are not racking up so much in interest every year.
Let's look at this using a couple of sums.
If you have a loan of £150,000 and pay interest of 3 per cent over 25 years, the total cost of the mortgage over that period will be £213,395.
That means you will have paid £63,395 in interest in that time.
If you made a single £50,000 overpayment, the total cost comes down to £173,545.
That saves you £39,850 in interest and shaves over ten years off the mortgage. This doesn't include any early repayment fees.
Alternatively, if you invested £50,000 in funds for 25 years and got a return of 5 per cent after charges, you would have £174,502 after that time - a profit of £124,502.
Of those scenarios, the investment does appear to come out better, but it's not quite as simple as that.
You can't guarantee investment returns - you can just as easily lose as gain when investing.
You also have to consider what you are most comfortable with.
Many people would much rather be rid of debt and free of monthly mortgage repayments a decade ahead of schedule than tie up their money in investments for 25 years.
Check the terms and conditions on your mortgage to find out about any early repayment charges and consider speaking to a financial adviser before you decide where to put such a large sum of money.
If you have an investment question, get in touch at: Investment Clinic, Money Mail, Northcliffe House, Derry Street, London W8 5TT.
GET MORTGAGE-FREE QUICKER WITH A CHEAPER DEAL
Rates at near rock-bottom levels mean those with ambitions of getting mortgage-free could switch to a cheaper deal but continue to pay the same amount as before, thus chipping away at the balance.
Our mortgage calculator and best buys table can show you a full list of the best deals that suit your circumstances.