Should we pay off our mortgage or keep cash for renovations? | Money

Q We are in a very lucky position, and this is a nice problem to have. My partner’s mother has decided to retire early, inspired by the time she’s had to reflect during lockdown. As part of this she is selling her mortgage-free home in London to move out of the city. From the proceeds of this she wants to give us money to clear our existing mortgage. We only bought the house a year ago, and while this was a possibility for us in the future, we had expected her to be working for another three to five years.

This will finally help us to get round to actually doing some of the renovations our home needs (primarily a roof that doesn’t leak to start with). What we are unsure of is how our mortgage lender would see this, and if it’s best to clear the whole thing and apply for a new mortgage for £30,000 to £40,000 to cover the cost of renovations and so dramatically reduce our monthly payments over a 10-year term. Our house is currently worth about £200,000.

Or would we be safer keeping a portion of the cash, paying off some of the balance and trying to reduce the monthly payments on our existing deal? We are on a five-year fixed-rate deal. Or is there another option we haven’t thought of?
SH

A There are several options you haven’t thought of, but first I have some advice for your partner’s mother. I don’t think that she should hand over any cash to your partner until after she has bought and settled into her new home outside London. It is easy to fall into the “Escape to the Country” trap of thinking you can get more for your money outside the capital and then discovering that you can actually not get quite as much as you would like.

I would also urge her to get a move on to take advantage of the current stamp duty land tax (SDLT) tax-free amount of £500,000 for purchases in England and Northern Ireland which ends on 31 March 2021. For purchases in Scotland and Wales, the temporary tax-free land tax amount is £250,000.

When your partner’s mother does give your partner whatever cash is left over after buying her new home, the last thing you should do with it is clear your mortgage. Because you are on a five-year fixed-rate deal, you will be liable for early-repayment charges. In the first year of a five-year mortgage deal, the fee is typically 5% of the amount repaid, in the second year 4%, and so on until the fifth year when the fee is 1%.

Instead, I would use the cash to fund your renovations rather than borrowing a fixed amount to pay for them. If you are a fan of property renovation programmes, you will know that building work invariably ends up costing more – sometimes a lot more – than the figure you first intended.

Once the renovations are over, if there is any cash left, you can find out how much of your mortgage you can pay off each year without facing an early-repayment fee. Many bank and building societies let you pay off 10% of an outstanding loan each year without charge but it’s best to check your lender’s specific terms.

It would also be worth checking whether your partner feels that his or her mother’s cash injection should change the percentage share that you each have in the property. You should also get any change you both agree put in writing.

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