Robbing Peter to pay Paul?

crumb_2

I've joined this forum with a particular question in mind. We have an offset mortgage on which we make regular overpayments. We now owe about £30,000 and the house is valued at £175,000. I am looking for a way to free up some cash to spend on the house but don't want to add it onto the mortgage. I have been told my my lender that we can borrow another £100,000 on my mortgage, adding on about £150 per month by pushing up the term another 24 years. My plan is to buy a property for about £90,000 and spend £10,000 on renovation and hopefully make a nice little profit. Houses within that price bracket are very thin on the ground and I wondered if instead I should bank the £100,000 advance in a high interest savings account for six months (I am a non tax payer) and taking into account the £150 per month plus £299 fee from my lender I could make about £1,100 in interest from my savings account.

Now to the point - is this legal, is everyone at it or have I missed something glaringly obvious?

Mrs_pbradley936

If you buy another property and sell it you will be liable for Capital Gains Tax
the rate is 40% but you have an allowance of £8800 and if you are married you can use your other halfs allowance as well.

I do not think that I would want to borrow to save.

crumb_2

My query was about what to do with the money if I can't find a property. Is it OK to bank the advance for 6 months, pay it back to my lender and keep the interest?

oops_a_daisy

if you could pay it back without penalty then it should be ok but dont forget that you will be paying the interest on the extra taken out on the mortgage for the 6 months so the interest earned will all go on increased mortgage payments and if the rate of interest paid is lower then you pay on your mortgage you will lose out - depends on the interest rates concerned.

crumb_2

Yes Albertross, on account of the fact that I make a large overpayment each month. The intention is to free up the interest accrued on the advance in order to do some work on the house, not to actually offset it. I'll be speaking to my financial advisor on Monday, but at this stage I am wondering if anyone else has been in the same situation.

crumb_2

In actual fact the minimum monthly payment is about £300, we pay just under £500 and the quote is £634 for the £100,000 plus what we already owe (£30,000) over 24 years. Hope that makes sense!

Galeboy

crumb wrote:

In actual fact the minimum monthly payment is about £300, we pay just under £500 and the quote is £634 for the £100,000 plus what we already owe (£30,000) over 24 years. Hope that makes sense!

and there lies the answer.

The 150 isn't the cost of the loan...it is just the difference in between your current spending (when you are making big overpayments) and a much longer term mortgage (with no overpayments). So don't think this loan is only costing you an extra 150 a month. If your advisor said you can have 100k for only 150/month then you've been mis-sold a product!

If you want to know whether it is worth doing what you suggest, you should just compare the interest rate you will be paying on the mortgage with the interest earned in the savings account. Unless, you have some very reduced interest rate, you'll lose out. Plus you have to factor in any early repayment fees.

Is it legal? Yes. Can this sort of thing work? Yes. Look at the "stoozing" sub-board under the credit card forum.

crumb_2

Some food for thought there Galeboy, I won't be making any decisions before I've done a few more sums. Thanks a lot.