‘Should I invest £450k or pay off my mortgage?’

Coming into a windfall brings the age-old debate of whether to save or reduce debt. Jessica Beard does the sums

Coming into a large amount of money can be exciting, but deciding how to spend it is always daunting. Sally Abbott, 55, has had £450,000 to spare since she sold some land and received an inheritance. But she and her husband are unsure whether to invest it in shares, pay off their mortgage or invest in buy-to-lets.

Mrs Abbott does not work and has a small pension worth £50,000. Her husband, 62, earns £ 110,000 a year and plans to work for five more years. However, he also takes out £14,500 a year from his pension, which now limits how much he can save.

The couple have six children and no plans to pass on an inheritance. “They will have to get on with it themselves,” Mrs Abbott said. “If there’s any left over they can have it, but otherwise it’s going to be used for our retirement.”

Their home in Essex is worth £1m but there is a £ 330,000 outstanding mortgage with a £ 15,000 early redemption penalty. They have an interest-only mortgage fixed at 1.89pc until July 2024. They can overpay 10pc a year but plan to downsize in the next five years.

Mrs Abbott’s mother has dementia and lives with them. She put her £450,000 home into Mrs Abbott’s name more than seven years ago and it generates £1,300 a month nth in rent.

“I have considered using ing the windfall to get a four-bedroom m buy-to-let in Exeter,” she said. “My daughter aughter studied there, so we know the he area and could let it out to students. ts. I don’t imagine I have enough to buy something we would want nt to holiday in.”

She has never bought ht any shares or had an Isa, a, but is now considering g it. Would the couple be better off putting the money into pensions or Isas, covering their existing mortgage or invest- ing in a new buy-to-let?

Alex Hatfield

A chartered financial planner at The Private Office Mrs Abbott should consider a less binary solu- tion and invest the money ey across different pots rather er than viewing it as an either/or question.

She should reduce the outstanding mortgage debt using the 10pc facility but also invest in stocks and shares Isas and pensions. By using such savings accounts the couple can build a pot to pay off a large chunk of the mortgage in July 2024, when the fixed-rate deal ends. Doing it this way is a much cheaper and tax- efficient solution and they can benefit from investment returns.

They can save £ 40,000 a year between them into Isas – £ 160,000 between now and July 2024 – with no capital gains or income tax to pay, unlike with a buy-to-let.

As for pensions, Mrs Abbott does not work and is therefore restricted to paying in £3,600 a year including tax relief. She can invest that amount each year – £14,400 by 2024 – and her husband may have some scope to add to his pension. However, he has tapped it already and if his withdrawals included taxable income the amount he can save each year will have fallen from £40,000 to £4,000.

When it comes to her mortgage, it does not make sense to repay early given the £ 15,000 penalty. But she can overpay the mortgage by 10pc between now and July 2024, a total of just under £63,000.

Investing is often about spreading risk and by buying another property she would be t too exposed to the housing and rental m market, especially as she is already a land landlord. She should bear in mind the legal costs and stamp duty: a £400,000 r rental property will mean paying £ 22,000 in stamp duty. The b best time to consider a buybuy-to-let will be once their hom home mortgage has been re repaid and the downsize

d decided upon.

Amy Pethers A wealth adviser at Brewin Dolphin

Mrs Abbott’s predicament is common. However, her interest rate low, so it is likely that investing the money rather than overpaying the mortgage will be more beneficial. She is also considering downsizing in a few years. will release capital to the mortgage, which strengthens the case for investing.

Her interest-only mortgage costs only £6,237 a year, or £31,185 over five years. If she invested £330,000 in a mediumrisk portfolio over five years, she would generate returns of £121,000 if markets grew on average at 5pc a year. This far outweighs the cost of repaying the mortgage, so is a more efficient use of the money – particularly considering the early repayment charge.

Nevertheless, repaying debt can be an emotional matter and many people like the peace of mind that comes with not having a mortgage. At the very least, she should wait until July 2024 to avoid the early repayment charge.

Mrs Abbott and her husband are not making use of their annual £ 20,000 Isa allowance. An Isa is a very efficient savings tool as it is tax free on both the income and growth. This can be particularly useful at retirement when she starts to draw on her investments.

If she put £20,000 a year into her Isa from now and drew it out in 10 years’ time, she would have £264,135 available when she turns 65, assuming the same 5pc annual investment returns. If her husband also made use of his allowance, they would have £528,271.

In terms of pensions, it is unusual for her husband to be drawing his pension while working, as he is paying 40pc tax on this income. If he waits until he fully retires, there is a chance that he will pay less tax.

The couple could purchase a buyto- let property with the inherited money and receive an income from it. The rental yield is roughly 4pc in Exeter. However, as they don’t live nearby, they should consider that being landlords later in life could be onerous and pitfalls include problem tenants, void periods and letting agent and management fees. They would also not be able to access their money easily if they needed it for some reason.

If they do go down the buy- to-let route it is important they are mindful of income tax. As Mr Abbott is a higher-rate taxpayer, any income from property would be taxed at this rate, so it would be beneficial to keep it in Mrs Abbott’s name.