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Q We have recently been fortunate enough to inherit £90,000. Our mortgage term runs out in a couple of months and still has about £180,000 outstanding. For the past two years we have been on an interest-only arrangement. Given that I am afraid to open my stocks and shares Isa statements at the moment – they seem to go down in value every month despite my monthly £200 direct debit – I am unsure what to do with the money. Should I save it, use it to pay off a lump sum of the mortgage, or a mixture of the two? I am 37, in full-time employment and think (hope) my job is pretty secure. I have a non-working wife and two daughters aged five and one. Ideally we would like to move to a bigger house within the next 18 months. JM
A If you don't already have an emergency fund of, for example, the equivalent of six months' after-tax salary to tide you over in times of financial crisis, I would put some of your £90,000 inheritance aside for that.
But once you have made sure you have a financial cushion in place I would be tempted to use whatever is left to pay off part of your mortgage. You don't say what interest rate you are paying, but it is bound to be higher than the rate you will get on a savings account – especially now that bank base rate has gone down to 1%.
The other reason for paying off part of your mortgage is to bring it down to a size which would enable you to convert it from interest-only to a repayment mortgage. That way, by the time you move in 18 months' time you will have paid off more off your mortgage and will have more cash to put towards your new home. Converting to a repayment mortgage would also mean you won't have to rely on your Isa to provide a lump sum to pay off your mortgage debt, which may make life less stressful.
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