The so-called “great wealth transfer” is underway, and with soaring prices at the checkouts and sky-high bills, it has come at just the right time for many.
Rising inflation is affecting household budgets across the UK and other factors – from fiscal announcements to the war in Ukraine – are adding to market instability.
If you find yourself in receipt of a sudden inheritance, you might need to factor the current climate into your decision-making.
You could opt to pay off some of your mortgages. Equally, you might be conscious of the effects of inflation on cash savings and decide to turn to investment.
Either way, you’ll need to weigh up some significant pros and cons, with potentially long-term consequences.
Keep reading to discover the option that might work best for you, and how Globe IFA can help ensure you make the right decision.
An inheritance could be perfect for paying off your mortgage, but there are downsides too
The pros of paying off your mortgage early
A mortgage is a massive financial commitment and is likely one of your largest monthly expenses. Using spare cash or a sudden windfall to reduce these monthly outgoings will free up additional cash and help to pay off your debt more quickly.
Reducing your debt – and the duration of the debt – lowers the interest you pay. This might be especially appealing as interest rates rise.
The cons of paying off your mortgage early
If you have a fixed-rate or tracker-rate mortgage, you will probably find that repaying your mortgage early leaves you liable for an early repayment charge (ERC).
Charges usually vary between 1% and 5% but you could find that the percentage decreases over time. The percentage charge applies to the amount you pay off so double-check the charge with your lender before you decide and think carefully about how much to pay off.
There is usually a set amount you can pay off each year, 10% say, without a charge applying.
We can help you decide if your potential saving outweighs the charge so get in touch if you need help.
Investing your money gives it the potential to grow but there are risks attached
Pros to investing your money
The obvious benefit of investing is that you give your cash the chance to grow. You’ll need to have a long-term goal in mind, like your retirement, and you’ll need to be sure of your attitude to risk.
With inflation high and savings rates low currently, investing could offer the chance for inflation-beating returns. You’ll also be able to take advantage of the long-term benefits of compound interest, watching accumulated interest on interest grow your fund.
If you have spare cash or a lump sum that you have no immediate use for, using it to pay your future self could make all the difference in later life.
Cons of investing your money
The main con of investment is that there is risk attached and no guarantee of returns.
Investment should always be a long-term proposition and that means tying your money up for a long time, potentially even until you retire.
The money you pay into a pension will be tied up until at least age 55 (57 from 2028), so be sure you won’t need that cash in the shorter term.
Other factors to consider
While your mortgage is likely to be the biggest debt you hold, think carefully about whether you could use your spare cash or sudden inheritance to pay off other high-interest debt first.
Remember too, that once your money has been used to repay your mortgage or invest in your pension, it can’t be reclaimed. If you part with a large sum on your mortgage or pension and then encounter a financial emergency, you’ll need to know you have spare cash elsewhere.
Finally, remember that there is no one “right” answer and that the best decision for you will depend on your financial circumstances.
You might find that being mortgage-free gives you an enormous sense of financial wellbeing, but you’ll need to weigh this against looking after your future self and putting money aside for emergencies.
Get in touch
If you find yourself with spare cash at the end of the month, or you receive a sudden windfall, be sure to speak to us. We can help you use the money in the way that works best and makes the most sense to you.
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Buy-to-let (pure) and commercial mortgages are not regulated by the FCA. Think carefully before securing other debts against your home.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
