Should I take money from mortgage and put in savings account?

money2009

Hi, this is my first time on here and I would appreciate any advice. I have a flexible tracker mortgage at 1.25% interest. I have been paying in extra over the years and only have a couple of years left. However, I am wondering whether I should take say £40,000 out and invest this in a savings account or bond. I am a little scared by banks but see that National Savings are offering a 2yr bond at 3.65% (2.92% net). If I am correct the different between 2.92% and 1.25% means I would make around £500 per year. Am I missing something? Many thanks.

Lokolo

What if rates go up above the fixed rate?

Although unlikely, its a sceneraio you must consider.

If you believe the rate over the next 2 years won't go over 3.65% then go for it, but there are 1 year rates for that so you might want to consider getting shorterm fixed bonds rather than 2 years!

Maybe have a look at this:

http://www.thechelsea.co.uk/savings/invest_fixedrate_st_na_intro.html

For now. Then look at things when that matures.

JimmyTheWig

No reason why you can't make this work, but you do need to consider the risks.
We did something similar just over a year ago when we changed our fixed rate mortgage from repayment to interest-only and put the repayments into savings instead. We figured that 6% savings accounts were easy to come by so we'd be fine. But rates have come way down we've ended up paying a load of the repayments back onto the mortgage again! We've made money on the deal, but not as much as we thought we would.

Think about how quickly rates came down. Think about how quickly they could go up again. Not likely, but if it caught us out it could catch you out.
Why look at fixed rate savings at all? Why not go for instant access then you can pay the money back into the mortgage at any time. Much less risk for not much less interest.

Are there any fees associated with withdrawing this money from the mortgage?

The other big risk is seeing all that money sitting there in a savings account and withdraw some because you are short this month, or decide it's time for a new car, or you deserve a holidy, etc. If you fall into the trap of wasting this money, this will dwarf any interest you earn.