Question
I have an agreed mortgage of upto £70,000 at 0.75% above the BoE base rate (1.25%).
Should I borrow the max and buy a Buy to let or invest it at a higher rate than I would be paying? Or not do anything with it?Answer
It depends on how much risk you want to take and whether the attractive rate (0.75% above base rate) is for the life of the mortgage or just an initial offer period.
Let’s start with the lowest risk option, take the money and put it in a savings account. If you’re ok with 90 days notice you could currently earn 3.24% gross via an Investec High 5 account, equal to 2.59% for basic rate taxpayers and 1.94% if you pay higher rate.
Assuming you put the whole £70,000 in this account (in practice you’d probably want to limit it to £50,000 – the amount covered by the financial services compensation scheme) and choose the monthly interest option (to pay the mortgage on an interest-only basis) then at current interest rates you’d make a theoretical annual ‘profit’ of £1,393 if a non-taxpayer, £938 if a basic rate taxpayer and £483 if a higher rate taxpayer.
Sounds good, but you’ll need to factor in any costs relating to the mortgage, especially redemption charges in case you want to bail out - if interest rates rise there’s a risk the savings could start to lag the mortgage, especially if the mortgage rate is introductory rather than for the life of the mortgage.
No-one knows what will happen to interest rates over the next few years. My guess is that they’ll remain low, but I wouldn’t place a big bet on that.
If you can pay off the mortgage at any time without a prohibitive penalty and the figures work for you, then the savings route might appeal. You could even opt for a four or five year fixed rate savings account, where gross annual rates of 5% or more are on offer, but this could leave you stuck if rates rise.
A buy to let property is a lot more risky and inflexible, but could work out favourably longer term. Residential property yields currently seem to be around 5% a year, before costs and tax. However, you’ll need to factor in both purchase and ongoing costs (such as management fees, ongoing repairs and maintenance, as well as empty periods) - try using our Property Rental Yield Calculator to get a clearer idea of what profit, if any, you might make.
In the past many buy to let investors have been happy to break even re: mortgage costs on the basis they’ll profit from rising property prices. I wouldn’t be keen to run this strategy in the current climate, unless you think you can add value through development or plan to run the mortgage for the full term so you eventually own the property.
As for other types of investing, I’d be very nervous taking a punt with borrowed money. Invest in emerging markets and/or commodities over the next 20 years and I think you’ll do very well, but it’ll probably give you some very sleepless nights along the way.
Ultimately I think you need to gauge the possible profit then decide whether the potential hassle and/or risks are worth it. Our risk/return attitudes all vary, so there’s no right or wrong answer, other than feeling comfortable with whatever you decide.
I have an agreed mortgage of upto £70,000 at 0.75% above the BoE base rate (1.25%).
Should I borrow the max and buy a Buy to let or invest it at a higher rate than I would be paying? Or not do anything with it?Answer
It depends on how much risk you want to take and whether the attractive rate (0.75% above base rate) is for the life of the mortgage or just an initial offer period.
Let’s start with the lowest risk option, take the money and put it in a savings account. If you’re ok with 90 days notice you could currently earn 3.24% gross via an Investec High 5 account, equal to 2.59% for basic rate taxpayers and 1.94% if you pay higher rate.
Assuming you put the whole £70,000 in this account (in practice you’d probably want to limit it to £50,000 – the amount covered by the financial services compensation scheme) and choose the monthly interest option (to pay the mortgage on an interest-only basis) then at current interest rates you’d make a theoretical annual ‘profit’ of £1,393 if a non-taxpayer, £938 if a basic rate taxpayer and £483 if a higher rate taxpayer.
Sounds good, but you’ll need to factor in any costs relating to the mortgage, especially redemption charges in case you want to bail out - if interest rates rise there’s a risk the savings could start to lag the mortgage, especially if the mortgage rate is introductory rather than for the life of the mortgage.
No-one knows what will happen to interest rates over the next few years. My guess is that they’ll remain low, but I wouldn’t place a big bet on that.
If you can pay off the mortgage at any time without a prohibitive penalty and the figures work for you, then the savings route might appeal. You could even opt for a four or five year fixed rate savings account, where gross annual rates of 5% or more are on offer, but this could leave you stuck if rates rise.
A buy to let property is a lot more risky and inflexible, but could work out favourably longer term. Residential property yields currently seem to be around 5% a year, before costs and tax. However, you’ll need to factor in both purchase and ongoing costs (such as management fees, ongoing repairs and maintenance, as well as empty periods) - try using our Property Rental Yield Calculator to get a clearer idea of what profit, if any, you might make.
In the past many buy to let investors have been happy to break even re: mortgage costs on the basis they’ll profit from rising property prices. I wouldn’t be keen to run this strategy in the current climate, unless you think you can add value through development or plan to run the mortgage for the full term so you eventually own the property.
As for other types of investing, I’d be very nervous taking a punt with borrowed money. Invest in emerging markets and/or commodities over the next 20 years and I think you’ll do very well, but it’ll probably give you some very sleepless nights along the way.
Ultimately I think you need to gauge the possible profit then decide whether the potential hassle and/or risks are worth it. Our risk/return attitudes all vary, so there’s no right or wrong answer, other than feeling comfortable with whatever you decide.
Read this Q and A at http://www.candidmoney.com/questions/question133.aspx
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