Should I take available funds from morgage and put in savings account ?

hobbit

Long time reader, first time poster !
Have an offset interest and capital mortgage, at 0.5% above base rate. When we took out the mortgage, they gave us extra funds that were available at any time on the same conditions. Just wondering if i should utilise some of these in a savings account.
The calculator says if i take £10,000 out, then over the term of the mortgage left (17 yrs 9 months) we would pay £900 extra interest and monthly payment would rise by £49, which we can afford.

If i put this £10,000 in an easy access account, paying even 2% over the term, the end figure would be £14282.46. So 4282.46 interest, - £900 mortgage interest, leaves £3382.46 interest.

Know i could use a better interest account, but thought if i went low, then anything higher would be a bonus!

is there anything i am missing thats daft and makes this not a worthwhile opportunity ?
thanks

atush

It could be worth putting 10K (ie 5K each) into ISAs, but not over the remaining term. Just until the base rate goes up- at some point your interest on the mtg could be higher than what you would receive in savings interest.

If your ISAs are full, then perhaps instant access.

hobbit

Thanks, thats what i was thinking, just keep an eye on base rate and have in an easy-ish access place so could swap back in if/when rates went back up again.

bongoali

I think it's a no brainer if:

a) you don't have to pay any fees to take the available funds from the mortgage and put it back in
b) your savings rate after tax > mortgage rate
c) the money is in easy access accounts
d) the interest you earn doesn't then move you from lower tax to higher tax so you lose other opportunities (e.g. lower tax earners can get more childcare vouchers from pretaxed income than higher tax earners)

Just my opinion based on what I know

Jegersmart

If the principal was sufficiently large it might be worth doing, but I am not sure it is worth doing on a 10k stake. imho.

J

joerugby

hobbit wrote: »

Long time reader, first time poster !
Have an offset interest and capital mortgage, at 0.5% above base rate. When we took out the mortgage, they gave us extra funds that were available at any time on the same conditions. Just wondering if i should utilise some of these in a savings account.
The calculator says if i take £10,000 out, then over the term of the mortgage left (17 yrs 9 months) we would pay £900 extra interest and monthly payment would rise by £49, which we can afford.

If i put this £10,000 in an easy access account, paying even 2% over the term, the end figure would be £14282.46. So 4282.46 interest, - £900 mortgage interest, leaves £3382.46 interest.

Know i could use a better interest account, but thought if i went low, then anything higher would be a bonus!

is there anything i am missing thats daft and makes this not a worthwhile opportunity ?
thanks

There is something wrong with the figures. Are you sure you put 1% mortgage interest (not 0.5%) into the calculator?

psychic_teabag

For your savings, 10k at 2% compounded over 17 years would be 4002 interest. But don't forget that if you pay tax, you'd only be compounding at 1.6% => 3097

(But if you can get 2.4% tax free in a couple of ISAs, that gives you closer to £5k.)

hobbit

Thanks for replies.

The mortgage has its own 'show me' results button when you suggest taking money out/increasing payments etc, so assumed the calculator was using the 0.5% base rate plus 0.5%above base rate the mortgage terms are.

kidmugsy

You and your spouse can put ca £11k between you into Cash ISAs every tax year - presumably at some point you'd find the extra monthly payments a burden, but then if you use some of the interest to meet them, you could still be quids in.

hobbit

Had to check back on posts as couldn't remember it all to put on one reply!
will have 2x next years (april 2013) isas to use, so thats 10k tax free.

I don't earn enough to go higher tax at present, so no worries there, but worth thinking about for when kids are older and i go back full time. Thx

Axion

A few things to consider in my opinion:
- Are you making use of your annual ISA allowance without drawing on this mortgage allowance? if you are then tax will eat the returns, and the interest cannot be offset against the income for tax purposes.

- Secondly whilst I doubt savings rates will fall below base+50bps whilst the base rate remains low, if rates do start to rise again in the medium term this could very easily occur. So there is risk.

- Thirdly can you partially repay the mortgage early? Are there any fees/penalties? If you can repay without penalty then you have an option to circumvent the risk that savings rates fall below your threshold.