Question
Can you please help, I have an interst only mortgage of £119,000 at under 1.75% which expires in 8 years. I have the money to pay it off. However as I am retired it may make sense to put this money into a safe savings/bond/gilt etc account for the eight year period, at a greater rate of interest . I am risk averse so may pay of £19,000 now to cover any interst rise and invest the £100k 50/50 in a couple of savings accounts. I would want to be sure as can be that I get the principle sum back no matter what. Any advice would be much appreciated.Answer
On the surface this looks like a good idea. With 5 year fixed rate bonds currently paying around 4.5% before tax and your mortgage costing under 1.75% you should be quids in.
But, a few points to bear in mind:
Firstly, your mortgage probably charges a variable interest rate. So, if interest rates shoot up you could find the mortgage starts to cost more than you'd earn on your savings - there's no guarantee of profit over the full 8 years.
Although soaring rates look unlikely, it would be foolish to rule this out. Provided you stick to savings accounts that allow you to withdraw money at short notice this shouldn't be a problem, as you could quickly repay the mortgage (check whether there's a penalty for doing so). But the highest interest rates are currently offered on 5 year fixed rate bonds - which lock you in somewhat. If you do opt for a fixed rate bond then choose one that lets you access your money before maturity, you might face an interest penalty but at least you can get your hands on the money in an emergency or to pay off the mortgage if it becomes unprofitable. When a fixed rate matures you can then shop around for the best deals at that time until the mortgage is due for repayment.
If you're a taxpayer then the interest earned on the savings will be taxed. So a 4.5% gross rate would fall to 3.6% for a basic rate taxpayer and 2.7% for a higher rate taxpayer. Still profitable, but less than you might initially think. On £100,000, assuming a gross savings rate of 4.5% and mortgage rate of 1.75% you'd expect to profit by around £2,750 a year if you're a non-taxpayer, falling to £1,850 after basic rate tax and £950 after higher rate tax.
If you're aged 65 or over you should also consider any impact on your age-related personal allowance. During the current tax year someone aged between 65-74 enjoys a higher personal income tax allowance of £9,490 rather than the standard £6,475. However, this reduces by £1 for every £2 you earn above £22,900 (down to a minimum £6,475). So if the interest earned on your savings pushes your income above £22,900 you'll not only pay basic rate tax (20%) as normal but also lose some personal allowance, making an effective overall tax rate of 30%. Again, you should still profit overall but just bear this in mind.
As for security, you're wise to hold no more than is covered by the Financial Services Compensation Scheme (FSCS), currently £50,000 per institution per person. Although this is rising to €100,000 (around £85,000) from next year, you'll still need two accounts to ensure your money is fully covered. If a bank or building society does go under then you'll get your money back, hopefully within a few weeks, but won't receive any interest for the period of time between the bank going into default and you receiving compensation.
Take a look at a comparison site such as Moneyfacts for the best savings rates currently on offer. But at the time of write the AA is offering 4.55% fixed for 5 years (allows access with penalty) while United Trust Bank, ICICI and State Bank of India all offer 4.50% (but no access allowed). There are a number of accounts offering easy access variable rates of around 2.5%-3%, but as these rates tend to wane over time you'll need to review regularly and be prepared to move elsewhere if need be, especially if the rate includes a temporary bonus.
Finally, if a taxpayer you could consider cash ISAs to ensure tax-free interest, but as the amount you can contribute is capped at £5,200 this tax-year per person, rising to £5,340 next year, you're restricted on how much of the money you can shield from the taxman.
Hope you end up making a nice profit!
Can you please help, I have an interst only mortgage of £119,000 at under 1.75% which expires in 8 years. I have the money to pay it off. However as I am retired it may make sense to put this money into a safe savings/bond/gilt etc account for the eight year period, at a greater rate of interest . I am risk averse so may pay of £19,000 now to cover any interst rise and invest the £100k 50/50 in a couple of savings accounts. I would want to be sure as can be that I get the principle sum back no matter what. Any advice would be much appreciated.Answer
On the surface this looks like a good idea. With 5 year fixed rate bonds currently paying around 4.5% before tax and your mortgage costing under 1.75% you should be quids in.
But, a few points to bear in mind:
Firstly, your mortgage probably charges a variable interest rate. So, if interest rates shoot up you could find the mortgage starts to cost more than you'd earn on your savings - there's no guarantee of profit over the full 8 years.
Although soaring rates look unlikely, it would be foolish to rule this out. Provided you stick to savings accounts that allow you to withdraw money at short notice this shouldn't be a problem, as you could quickly repay the mortgage (check whether there's a penalty for doing so). But the highest interest rates are currently offered on 5 year fixed rate bonds - which lock you in somewhat. If you do opt for a fixed rate bond then choose one that lets you access your money before maturity, you might face an interest penalty but at least you can get your hands on the money in an emergency or to pay off the mortgage if it becomes unprofitable. When a fixed rate matures you can then shop around for the best deals at that time until the mortgage is due for repayment.
If you're a taxpayer then the interest earned on the savings will be taxed. So a 4.5% gross rate would fall to 3.6% for a basic rate taxpayer and 2.7% for a higher rate taxpayer. Still profitable, but less than you might initially think. On £100,000, assuming a gross savings rate of 4.5% and mortgage rate of 1.75% you'd expect to profit by around £2,750 a year if you're a non-taxpayer, falling to £1,850 after basic rate tax and £950 after higher rate tax.
If you're aged 65 or over you should also consider any impact on your age-related personal allowance. During the current tax year someone aged between 65-74 enjoys a higher personal income tax allowance of £9,490 rather than the standard £6,475. However, this reduces by £1 for every £2 you earn above £22,900 (down to a minimum £6,475). So if the interest earned on your savings pushes your income above £22,900 you'll not only pay basic rate tax (20%) as normal but also lose some personal allowance, making an effective overall tax rate of 30%. Again, you should still profit overall but just bear this in mind.
As for security, you're wise to hold no more than is covered by the Financial Services Compensation Scheme (FSCS), currently £50,000 per institution per person. Although this is rising to €100,000 (around £85,000) from next year, you'll still need two accounts to ensure your money is fully covered. If a bank or building society does go under then you'll get your money back, hopefully within a few weeks, but won't receive any interest for the period of time between the bank going into default and you receiving compensation.
Take a look at a comparison site such as Moneyfacts for the best savings rates currently on offer. But at the time of write the AA is offering 4.55% fixed for 5 years (allows access with penalty) while United Trust Bank, ICICI and State Bank of India all offer 4.50% (but no access allowed). There are a number of accounts offering easy access variable rates of around 2.5%-3%, but as these rates tend to wane over time you'll need to review regularly and be prepared to move elsewhere if need be, especially if the rate includes a temporary bonus.
Finally, if a taxpayer you could consider cash ISAs to ensure tax-free interest, but as the amount you can contribute is capped at £5,200 this tax-year per person, rising to £5,340 next year, you're restricted on how much of the money you can shield from the taxman.
Hope you end up making a nice profit!
Read this Q and A at http://www.candidmoney.com/questions/question310.aspx
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