Lump sum, mortgage or university fees?

veronese68

We will be getting a lump sum in a little while when an old endowment policy matures. We changed most of the mortgage to repayment many years ago, but some is still interest only. The sum currently forecast could pay off 40% of the mortgage thus cutting our payments or reducing the term quite substantially. We can pay lump sums without incurring a penalty. However, the wife thinks we should keep the money and put it towards university fees for the kids which will start in a couple of years. I think the money saved on mortgage payments would put more into the university pot, but I don't know how to do the figures to illustrate this. What does the hive mind think?
Unfortunately the policy is in the Wife's name from the flat she used to own, so a new bike for me is highly doubtful.

captain_kirk

Put it all on black, then you could do both

(or neither, depends on the outcome)

fenix

I think a student loan is the lowest interest loan you can get - so I'd not put much money into that.

Personally I'd want to pay off some of the mortgage - I know you could probably get better returns in shares - but at least you'll have less to pay off in the future if something awful were to happen.

I'm not a real Financial Adviser but I've spoken to one and that was the gist that I picked up.

drlodge

Don't spend it on Uni fees - the amount kiddy will owe from the loan is irrelevant, since they'll likely be paying off 9% for 30 years until the loan expires. Borrow as much as you can, some will get written off.

As for other uses - look at the interest charged or growth rates. My mortgage is 2.5%, but I am getting nearer 5-7% on my pension, so on that basis its much better to invest it into your pension - you also get tax relief.

hopkinb

Pay down debt, starting with the most expensive. Watch out for early redemption fees on mortgage debt though. Student loans are super cheap money for the kids, but as you say, if you can reduce your mortgage or other debt repayments, you can put the extra money towards helping them out with tuition/accommodation. Personally, I'd keep the mortgage payments as they are though, and reduce the term. Being mortgage free earlier than expected is an attractive prospect!

slowbike

I understand the "keep the lump sum" desire - but I have to agree with the others thoughts on mortgage or pension - but it depends on your individual circumstances.

Once you've put the money into a pension or paid off the mortgage it's basically irretrevable - so whilst it will reduce your term or payments on the mortgage giving you more cashflow you won't see the true benefit until much later. Where as keeping it under the mattress means you could draw on it at will - blow it (or part of it) on an awesome holiday, buy a new car, do that building work/move home that you've always wanted to do or even have it there "Just in Case" - our "Just in Case" was the rather suprise news that we were going to have a child - so a nice Just in Case - but handy none-the-less!
The problem with paying off the mortgage is that unless it's a significant sum, it doesn't have such a significant effect on the repayments - and cutting a year or two off the term still seems like a long way away. That said - I'd still prefer to pay off more anyway - knowing that once it is done we've got a good sum each month now available for other things!

Man Of Lard

Some mortgages allow for an "overpayment reserve" - so if you have overpaid, there's a sum that is retrievable... but all the time it's in overpayment the interest on the mortgage is reduced so reducing the term (or total required payment) even if you withdraw it later...

As per hopkinb - pay off debts in descending order of APR - but retain some liquidity in case of catastrophe.

keef66

When our last endowment matured we asked the B. Society how much the mortgage payments would fall if we paid the lump sum off. It was so little, and the interest on the mortgage so low, that we stuck it in a 5 year fixed rate bond which has generated an extra £5k. Sadly no savings around now offering the same kind of return

DrLex

Why not use part for a holiday for both of you? Paying off the mortgage with all of it seems desperately dull.

dhope

Student loans aren't as great as they were. Cheapest money ever may not be true anymore.

If it were me I think I'd go for the mortgage option, reducing the term rather than the payments...

CiB

Was in a similar position a while ago, with a plan to pay down the mortgage leaving just a residual endowment to run out its last few years, and put aside enough for uni fees. The advice then (4, 5 years ago?) still holds - don't pay off the uni fees up front as it's a debt that may never need to be paid, and is safe to put off for a while anyway. Paying off the mortgage or a part of it is still a bigger benefit esp when it reduces the term as the interest paid falls away significantly with a reduced term, and for all the financial advice it's still a massive weight off the shoulders when the mortgage finally clears.

Why not use part for a holiday for both of you? Paying off the mortgage with all of it seems desperately dull.

Dull it may be, but it frees up the rest of your life, and quality of life with a sudden lift in disposable income is pretty good thanks esp compared to a fortnight loafing about. Horses for courses though, as ever.

veronese68

We did a once in a lifetime holiday to California last year with a chunk of cash I got for being knocked off my bike so couldn't really do that again. We have pretty good holidays that we enjoy anyway.
Lots of interesting points made and plenty of food for thought but keep it coming. The mortgage is the only real debt we have, no car loans and we tend to pay cards off quickly. I don't like being in debt. The mortgage is fairly small by London standards at least as we've lived in the house for 21 years now.

Man Of Lard

Veronese68 wrote:

I don't like being in debt.

There's your answer then.

Ben6899

Reduce the mortgage. All day long.

imatfaal

This is a terribly middle class piece of advice - make sure you check the proposed amount of your pension fund/expected payout if you are thinking of adding to pension pot; especially if you are on a good final salary pension. I seem to remember payout was estimated as 20 years on max possible pension - worth doing the sums and talking to your pension provider. This govt has lowered the level of max fund/payout size that is exempt from tax - you could end up with a shock on the amount of tax that might be payable in the future. Would be damned annoying to do the sensible thing and lose out.

singleton

My eldest has just finished her second year at Uni and the youngest has just finished A Levels.

DO NOT use it to pay uni fees. Student loans are not really loans since the student is not obliged to pay it back. If they earn enough money then they will pay back small amounts at low interest (like a tax) but they are not obligated to pay it all back - so why pay for something that you may not have to?

If you want to be good to your kids then give them a lump sum after uni that they can use as a deposit on a house.

veronese68

Man Of Lard wrote:

Veronese68 wrote:

I don't like being in debt.

There's your answer then.

Unfortunately it's a 2 person decision, I need to justify my opinion.

veronese68

Singleton wrote:

DO NOT use it to pay uni fees. Student loans are not really loans since the student is not obliged to pay it back. If they earn enough money then they will pay back small amounts at low interest (like a tax) but they are not obligated to pay it all back - so why pay for something that you may not have to?

Ah, you're a couple of years ahead of us then with both of them. I think it's more that we would have to supplement the loans and the money would be used for that.
This is a middle class problem so middle class advice is entirely appropriate.

slowbike

CiB wrote:

Why not use part for a holiday for both of you? Paying off the mortgage with all of it seems desperately dull.

Dull it may be, but it frees up the rest of your life, and quality of life with a sudden lift in disposable income is pretty good thanks esp compared to a fortnight loafing about. Horses for courses though, as ever.

Hmm - we had a small inheritance a good few years ago - put 1/2 away and spent the other 1/2 on a safari holiday - a good holiday that doesn't fit in the norm is good - we still recall the time spent over a decade later.

But then he's already done a major holiday - so that's that one out ... Back to the mortgage paydown ...

mrfpb

Uni debt is still cheap. If you want to help your kids, set up some sort of ISA, such as Help to Buy, so they can afford a deposit on something when they leave Uni. Otherwise look at your own mortgage.

d00d4h

Paying off my mortgage early was the best thing I did last year. I now have no debt (no finance, and credit cards are paid off each month). There is definitely a psychological benefit from doing this. It gives a certain sense of freedom.

Also, even just reducing your mortgage may be a good idea, as some are predicting a house price crash. Reducing the risk of negative equity might be a prudent move.

pblakeney

Rainy day amount put into an ISA.
Pay the rest towards reducing the mortgage term. Do the sums. The amount saved overall is staggering.

singleton

Veronese68 wrote:

Ah, you're a couple of years ahead of us then with both of them. I think it's more that we would have to supplement the loans and the money would be used for that.
This is a middle class problem so middle class advice is entirely appropriate.

Yes, I do supplement the living costs since that part of the loan is means tested and she doesn't get it all. I don't really agree with means testing a student loan since they are legally adults and any means testing should be done on their income not mine, but whatever your views on that subject, I don't think that she should suffer just because I earn a bit more than average.

And no that doesn't make me rich and I don't have a cervelo or a dogma :-).

secretsam

A really, really nice bike

YIMan

Why not change to an offset mortgage? Then you get the benefit of reducing mortgage interest and paying it off early, but also the flexibility that the money is there to do something with if you need it.

navt

Give it to charity.

captainwheezy

Pay it into the mortgage definitely. I paid mine off earlier this year 11 years early (was a 20 year mortgage). I'm now debt free and faced with the problem of where to stick all the extra money I earn that I was previously overpaying, not such a great hardship! I saved tens of thousands in interest and since my employer has made about 80% of my colleagues redundant over the last 7 years (which is why I was overpaying so much), its a massive weight off my shoulders should I suddenly find myself out of work.

My mortgage was a flexible one that meant I could get the overpayments back if required but even if this wasn't the case, I'd still have payed it off.

itboffin

Simple I'll look after it for you nice and safe until (if) you ever need it back

surrey_commuter

If you are trying to persuade the missus I would pay off the interest only in full no then chip way at the repayment. I would leave the term the same and cut the monthly outgoings so she can see the immediate benefit.

LiveGiantlyAgain

I would put towards the mortgage...

Having and keeping a roof over your head is top priority, don't know what the future holds...and in most cases, mortgages are the biggest debt

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