Incoming inheritance - pay off mortgage or invest?

[Sr. Tayto]

Making my previous post a bit more readable. Mods feel free to delete the last one.

Personal details

Your age: 34
Your spouse's age: 36
Partner's age if not married:

Number and age of children: 0 (and no plans for more)


Income and expenditure
Annual gross income from employment or profession: 100k for the next 4 years, then probably a lot less (~30k)
Annual gross income of spouse/partner: 10k for the next 2 years then ~40k

Monthly take-home pay: 3-4k net

Type of employment - Employee
Employer type: Private company

Maxing pension contributions and investing about 500 a month.


Summary of Assets and Liabilities
Family home value: 260k
Mortgage on family home: 214k left


Personal shares : 50k in ETFs mostly
Cash: 2k
Defined Contribution pension fund: 40k
Company shares : 15k

Incoming inheritance : ~150k + house worth ~200k

Total net assets: 500k


Family home mortgage information
Lender : PTSB
Interest rate : 4.6% fixed till next year

Remaining term: 29 years
Monthly repayment: 1137




What specific question do you have or what issues are of concern to you?
I'm thinking of paying off the mortgage with the 150k, bringing payments to about 300e monthly. I would just be paying the principle, saving me about 150k in interest (averaging 3.6% interest over remaining years) And then probably rent the house out for about 600 net a month.

Is this a smart decision? I don't like my high paying job, I could potentially move to something more enjoyable/part time and keep my same standard of living.

What are my other options? Invest and hope to beat 3.6% after tax?

 

[Cervelo]

If it was me I'd pay the mortgage off in full or at the very least knock €150k off it and keep the repayments as is, to clear the mortgage quicker
and then use those mortgage repayments to fully invest in your retirement funds
With regards to renting the house that's up to you if you feel you have the appetite to handle the good and the bad of been a landlord in todays market, Me, I'd sell and invest in the stock market to help with future expenditure and lifestyle choices that are going to come your way

 

[IsleOfMan]

Maybe take your inheritance and sit on it for awhile. I inherited a chunky sum in 2013 from my parent's estate. I still have this sum with some invested in State Savings, AIB 3 year, PTSB 3 year and the stock market plus Prize Bonds. I will add that I do not have a mortgage or any loans.

As my adult children and grandchildren get older I have been able to help out.

Knowing that our funds are there and available gives a sense of security to us.

We splash on holidays but are still frugal in other ways. I don't think our lifestyle is going to change in any way.

Maybe pay €75k off your mortgage and see how you feel after that. Use the other €75k for extra treats for yourself and your partner over the coming years.

 

[Brendan Burgess]

Annual gross income from employment or profession: 100k for the next 4 years, then probably a lot less (~30k)
Annual gross income of spouse/partner: 10k for the next 2 years then ~40k

Personal shares : 50k in ETFs mostly
Cash: 2k
Defined Contribution pension fund: 40k
Company shares : 15k

Incoming inheritance : ~150k + house worth ~200k

This is crystal clear.
You have a very unusual career path.
You don't like your job.

You need maximum flexibility.
You achieve maximum flexibility by selling the investment property and clearing your mortgage.

Look at it like this. Would you borrow €200k today at an interest rate of 4.6% to buy this particular property? And you are getting no tax-relief on the interest paid on the mortgage. The answer should be a clear no.

So sell the investment property as soon as possible.
Clear the mortgage - you will pay an early break fee but you just have to live with that.
Maximise the pension contributions while you are getting 40% tax relief.
Invest the balance in shares.

then you have total flexibility.
Low outgoings.
And if you need cash because you quit your job or whatever, then you can sell some of the shares.

 

[Sarenco]

Are you sure you are maximising your tax-relieved pension contributions? The €40k balance seems very low.

Agree with others that you should use the inheritance to clear your mortgage.

 

[Sr. Tayto]

Are you sure you are maximising your tax-relieved pension contributions? The €40k balance seems very low.

It's low because I've only started the job in the last few years. Before that I was travelling, basically chose the job because of the pay, ability to buy house and put my wife through uni.

You achieve maximum flexibility by selling the investment property and clearing your mortgage.

Look at it like this. Would you borrow €200k today at an interest rate of 4.6% to buy this particular property? And you are getting no tax-relief on the interest paid on the mortgage. The answer should be a clear no.

So sell the investment property as soon as possible.
Clear the mortgage - you will pay an early break fee but you just have to live with that.
Maximise the pension contributions while you are getting 40% tax relief.
Invest the balance in shares.

Maybe I wasn't clear, the house would be inherited also. I wouldn't pay 4.6% interest to buy this particular property but it could appreciate a little while generating some rental income also. I suppose that is subjective/speculative if it's worth it?

What sort of calculations would I need to consider when paying a lump sum vs paying the whole thing off?

 

[Sarenco]

If you’ve been maximising pension contributions for the last few years, your balance should still be a lot higher than €40k.

In any event, it doesn’t change the core advice - clear your mortgage and maximise your tax-relieved pension contributions.

Keep it simple.

 

[Brendan Burgess]

Maybe I wasn't clear, the house would be inherited also. I wouldn't pay 4.6% interest to buy this particular property

It was I who was not clear.

Owning a mortgage free investment property while having a €200k mortgage on your home at 4.6%

is the same as

borrowing €200k at 4.6% to buy an investment property

If you would not borrow €200k to buy this property, then you should sell the property and repay your home mortgage.

 

[Sr. Tayto]

If you’ve been maximising pension contributions for the last few years, your balance should still be a lot higher than €40k.

2 years to be exact!

In any event, it doesn’t change the core advice - clear your mortgage and maximise your tax-relieved pension contributions.

Would this core advice ever not suit? As in, because rates are for the forseeable going to be over 2-3% and it's a guaranteed gain to pay the mortgage? Thanks for the advice!

 

[Sarenco]

Ok, but the equity markets have been on a rip for the last two years - your pension balance should be well north of €50k at this stage.

Given our tax code, IMO, it rarely makes sense to invest outside a pension wrapper while carrying debt, any debt.

Must say, I’m very impressed that you managed to amass net assets of over €150k in two years while earning €100k.

 

[noelÓm]

I agree with the contributors above. Sell the house and use all of the money to pay down your mortgage and give yourself room to explore an alternative job.

house worth ~200k

probably rent the house out for about 600 net a month.

(600*12)/200,000 = 3.6% net rental yield, which is poor enough given the risks. And at that price level, you are likely talking about a rural house or a house in a regional town, which generally should be yielding more. Take the €200,000 and put it to better use. Like paying down your 4.6% mortgage. You might get capital appreciation on the house and you might not. But, you will for sure reduce your interest bill if you pay down your mortgage. I think it's the better risk-return option and, in your circumstances, it provides a lot more flexibility to switch jobs.

I could potentially move to something more enjoyable/part time and keep my same standard of living.

A joint income of (€100,000+€40,000=)€140,000 offers better life choices (e.g., pension contributions, early retirement) than a (€30,000+€40,000=)€70,000 income. Be sure that you have evaluated this carefully before going part-time. It might be difficult to reverse course, depending on your field.

Lender : PTSB
Interest rate : 4.6% fixed till next year

Expensive. If you decide to keep the mortgage, then revisit the rate ASAP.

Number and age of children: 0 (and no plans for more)

What would happen if your spouse changed their mind? How would you cope on €30-€40,000 per annum or €70,000 minus childcare.

then probably a lot less (~30k)

Does your spouse know about this plan? This is not a relationship forum, but to the extent that you want to execute a financial plan, it makes a lot of sense for you to both be on the same page.

 

[Sr. Tayto]

If you would not borrow €200k to buy this property, then you should sell the property and repay your home mortgage.

Ah that is a good way to look at it, makes you think! Thanks!

Expensive. If you decide to keep the mortgage, then revisit the rate ASAP.

All we could get at the time. But yeah, very expensive.

joint income of (€100,000+€40,000=)€140,000 offers better life choices (e.g., pension contributions, early retirement) than a (€30,000+€40,000=)€70,000 income. Be sure that you have evaluated this carefully before going part-time. It might be difficult to reverse course, depending on your field.

Yeah good point. I suppose we are on 110k at the moment, if we clear the mortgage and are on 70k, it's a lot closer to the same standard of living as now, probably a bit less but still close.

Thank you for the insights though, helpful!

 

[ClubMan]

Yeah good point. I suppose we are on 110k at the moment, if we clear the mortgage and are on 70k, it's a lot closer to the same standard of living as now, probably a bit less but still close.

As ever in such cases, it would make sense to analyse your actual necessary and discretionary expenditure to identify for sure what your spending needs and wants actually are rather than just assuming that you need some vague figure to get by and live your preferred lifestyle.

In my experience, where the vast majority of my expenditure is via debit and credit cards, downloading my current account and credit card statements (e.g. for a full year) in a format (usually CSV) that I can import into a spreadsheet (I use Google Sheets) and then process, filter and categorise expenditure items gives a very clear picture of actual expenditure allowing me to plan better.