Mortgage or investment: how to use an inheritance

Q&A: Dominic Coyle

I have inherited €93,000 and have €99,000 outstanding on my EBS variable rate mortgage. Should I use the inheritance to clear the mortgage or invest? I am 53 years old with no dependants and would like to retire from my low-level public sector job in the next five years . . . or ideally tomorrow! I currently have 29 years service.

Ms MO’M, email

It's always good to have options and this inheritance windfall gives you precisely that. Like most of us, with little financial wriggle room, access to a significant amount like this can present a financial headache. Do I clear my debts or invest for further growth?

And the answer, of course, is that there is never any easy answer. Two different people will correctly make two very different decisions based on their personal circumstances, their age and their attitude to risk.

The basic question for you is whether there is greater benefit in one option over the other – and that depends on the cost of your debt or the investment gain you might make.

Starting with the debt side as it’s easier, this inheritance will allow you almost fully clear your mortgage. You know how much interest you are paying on this loan, so you have a sense of the cost. The EBS variable rate is currently 3.8 per cent.

But, of course, mortgage loans are probably the cheapest form of debt you will incur. Before you even look there, you should consider any other debts you might have – a bank overdraft, an outstanding accumulated credit card bill, a personal loan taken out for any other purpose with a bank or credit union. On each of these, you will be paying far more interest than on your mortgage. Pay them off first.

Maybe you have no such debt or, in any case, you still have a sizeable chunk of this €93,000 left after paying them off. What next?

That brings us to the more uncertain side of the equation – investing. The bottom line here is that, without taking on some element of risk, you will make very little.

Putting the money into a standard bank saving account or guaranteed return product will deliver much less than the interest you are paying on your mortgage. In that case, you’d be better off paying down the mortgage.

If you were prepared to take on a greater level of risk, you might well earn more than what you are paying on the mortgage but, then again, you might not – that’s the nature of risk. You might earn nothing: you might even lose some of this nest egg – and you might feel this is not something you would be happy to countenance.

A further consideration is that your age – and more especially your intention to retire within five years – means that any financial adviser would likely suggest that this is not an appropriate time for you to take on too much risk. As someone, in your own words, in a low-level public service job, I am assuming your financial means are limited and that would also influence a more cautious approach from a financial adviser.

In any case, risk is something you need to be comfortable with, and many people are not.

My guess – and I must stress that I am not an accredited financial adviser but a journalist – is that you might be happier paying down the mortgage and at least put yourself in a position where you will be almost debt free. Then you will possibly have more freedom to choose when you retire.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice