Should I use a £75,000 inheritance to pay off the mortgage? | Mortgages

Should I use a £75,000 inheritance to pay off the mortgage? | Mortgages

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Q I’m due to inherit about £75,000 and I’d like some advice on what best to do with it. We have about £85,000 left on our mortgage. We have been considering moving house for the past couple of years but the houses we have been looking at are a bit of a jump from where we are now.

Our current house would sell for between £250,000 and £270,000 but the ones we are looking at in the area we want to be in are on the market for about £400,000. We can overpay on our fixed-rate mortgage – which is due to come to an end in November 2025 – and have no restrictions to how much we can pay off.

My question is, do I use most of the money to pay off the current mortgage? Will doing that that help get a better rate if we do move house and for when we need to remortgage? What if the value of our house goes down in this time? Or do I keep some of it in savings as if we do move to a new house it will help cover some of the extra costs (buying new furniture and moving costs)?

I’m not entirely convinced we need to move house right now, as we might just be happier in these uncertain times having a bit of stability despite wanting a little extra space to make working from home more comfortable.

A If your mortgage represented 90% of the value of your home, you are right in thinking that paying some of it off to bring it down to representing under 80%, 75% or 60% of its value would give you access to more competitive mortgage interest rates.

But assuming the value of your home is £270,000, your current mortgage is just over 30% of its value, so paying some of it off wouldn’t make a difference to the rates that are available to you. However, you might be able to get a better rate by remortgaging with a different lender or negotiating with your existing one.

If you were to move to a house costing £400,000 and assuming net sale proceeds of £173,300 from your current home – after deducting estate agent and legal fees, and stamp duty land tax (in England and Northern Ireland; different taxes apply in Scotland and Wales) – you would need a mortgage of £226,700.

This isn’t as low as your current mortgage percentage but it is still under 60% so giving you access to some of the best rates available. Using some – or all – of your £75,000 inheritance to pay for your new home makes no difference to the mortgage rates available to you, although it would make your monthly mortgage repayments lower as you would need a smaller mortgage.

An alternative to moving to get extra space to improve working from home would be to use your inheritance to extend your current property or convert existing space. According to research by the estate and lettings agent Barrows & Forrester, an extension can not only add space but also adds 15% to the value of a property. A garage conversion could add 10%, while creating a garden office adds 7.5%.

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