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Ask Paul: We inherited $140k, should we pay off our mortgage or invest?

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Q. We have received a $140,000 inheritance.

We have two kids, aged 12 and 9, a mortgage of $340,000 on a four-bedroom house in Sydney's Sutherland Shire and we earn about $100,000 in combined income.

We have no other loans except our mortgage and a $5000 credit card debt.

Linda and her husband have inherited $140,000 and are thinking of investing it. Paul Clitheroe has other ideas. "Opportunities like this to reduce debt are rare."

We were thinking of investing in a mortgage trust fund with $100,000 of the inheritance or paying this amount onto our mortgage. Any ideas? - Linda

A. This is a very timely inheritance, Linda. With two kids life is not cheap.

First up is the very obvious advice to clear the credit card. That will leave $135,000.

Personally I would not be investing this inherited money anywhere but your own mortgage.

An investment such as a mortgage trust fund is not without risk. Many of these have collapsed over the decades.

Sure, these would have been the higher-risk, higher-return trusts, but this is such a wonderful opportunity to dramatically reduce your mortgage

I would not miss it.

Chat to your lender about whether you can do this with an offset account, where the money "offsets" your mortgage but is accessible to you.

Any investment you make will earn taxable income, but reducing mortgage effectively gives you an earning rate equivalent to your mortgage interest rate.

I note you are planning to do this with $100,000 of the money you have inherited.

Do use the $35,000 left after paying off your card debt wisely, because opportunities like this to reduce debt are rare.

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Paul Clitheroe AM is the founder of Money and serves as the publication's editorial adviser. One of Australia's most trusted personal finance experts, Paul has spent decades helping Australians build wealth, manage debt and make smarter money decisions. He is widely known for host­ing the Money TV program and authoring best-selling personal finance books. Since launching Money in 1999, he has played a leading role in delivering practical, independent financial guidance to Australians. Paul is chair of InvestSMART Financial Services. He was the founding chair of Ecstra Foundation, a national not-for-profit focused on improving financial wellbeing, from 2018 to 2026, and led the Australian Government's Financial Literacy Board and Financial Literacy Australia from 2004 to 2019. In academia, Paul is chair in financial literacy at Macquarie University, where he is also a Professor in the School of Business and Economics. Ask Paul your money question. Due to volume, Paul cannot respond to questions posted in the comments section.
Comments
hazel turner
March 25, 2021 3.48pm

I am about to inherit $200,000 from my late father.

We are a family trust running a security company- our office is our investment- Bank have valued the premises at $475,000 and loan is $300,000.

Home is valued at $1.2 mill with mortgage of $300,000.

I intend to us the inheritance to lower our debts.

Which loan is it best to put payment towards or part to each?

Money magazine
Verified
March 25, 2021 4.31pm

Hi Hazel,

Thank you for your question. While our team can't answer it here in the comments section, we will pass it on to Paul Clitheroe for his consideration for a future Ask Paul.

- Money team