Mortgage early payment advice?

[treg817]

I have a mortgage of �140,000 over 25 years and am due to receive a windfall of �28,000. I am planning to pay this money off my mortgage but am unsure whether to reduce my payment amount or whether to reduce the time over it's paid off?

[Miss Zippy]

It would be preferable to use the money to reduce your mortgage term. That way you will be saving the amount of interest you would have otherwise paid over the 25 year term, which could amount to a few thousand pounds. You should check with your lender first that you are allowed to make this large overpayment and that there will be no penalties (some lenders only allow, for instance, 5% or 10% of the oustanding balance be overpaid in each year). You could, of course, get through any overpayment restriction by 'drip-feeding' in your overpayment (e.g. �1000 per month, or whatever the maximum is).

[BigMac]

Also consider switching to an offset mortgage. Put the windfall into a separate account linked to your mortgage - that will reduce the outstanding amount on which you pay mortgage interest. Although you will receive no credit interest on the windfall savings, you will probably 'save' more by not paying the extra mortgage interest. Finally, you will still be able to access the money if you needed it in an emergency.

I would also suggest making sure you utilise ISA limits (�3k for a cash mini ISA) which will allow you to retain access to some cash and receive any interest tax free.

There are other options too - if you fancy taking more of a risk you could consider stocks and shares ISAs or straight stock market investments. For this I'd suggest talking to an Independent Financial Adviser (IFA), preferably one who charges you with a fee rather than through commission.

There are lots of options, so a lot will depend on your age, priorities, aversion to risk etc.

Wish I had a windfall... must go out and buy a lottery ticket...