Index-linking + 0.15% a good deal?

VodkaSorbet

I've got an investment maturing shortly and I've been offered re-investment (tax free) for 3 years with index-linking + 0.15%.

Does this sound like a good rate? It doesn't sound that good to me but I suppose with the index-linking it's got to beat inflation.

Not sure I want to tie money up for 3 years, I could use it to pay some off my mortgage which is currently 4%.

Thanks for any advice!

EDIT:

have now just found another thread on this where people seem to think it is a good idea to reinvest - should have searched first!

EdGasket

i accepted that offer from NS&I because I believe inflation will stay above the level of savings interest rates elsewhere. As to whether you should just pay off the mortgage; that depends on whether you might need the money or not and whether you have a fixed-rate or variable rate mortgage and your inflation expectations.

kidmugsy

Could you pay enough off the mortgage to reduce the LTV far enough so that you can remortgage at a lower interest rate?

sabretoothtigger

I believe inflation will stay above the level of savings interest rates elsewhere

yep its practically official government policy

VodkaSorbet

kidmugsy wrote: »

Could you pay enough off the mortgage to reduce the LTV far enough so that you can remortgage at a lower interest rate?

There is only 25k on the mortgage (around £220k house value). It is BTL so not worth the cost to remortgage, and probably can't get a mortgage for so little anyway!

It's a variable rate mortgage.

I guess I expect mortgage rates to rise and inflation to go down in the not too distant future (just a gut feel), which is why I'm a bit hesitant about trying money up for 3 years.

EdGasket

If it's a variable rate mortgage then I would pay off the mortgage instead because if inflation rises then so will your mortgage rate. i.e. why invest for around 3% and borrow at 4%?

VodkaSorbet

EdGasket wrote: »

If it's a variable rate mortgage then I would pay off the mortgage instead because if inflation rises then so will your mortgage rate. i.e. why invest for around 3% and borrow at 4%?

That's what I was thinking.

Mortgage was 2.5% til recently so it made sense then.

iAMaLONDONER

sabretoothtigger wrote: »

yep its practically official government policy

Whatever they said about Thatcher , at least she fought inflation!

EdGasket

iAMaLONDONER wrote: »

Whatever they said about Thatcher , at least she fought inflation!

...and the Argies!

bowlhead99

EdGasket wrote: »

If it's a variable rate mortgage then I would pay off the mortgage instead because if inflation rises then so will your mortgage rate. i.e. why invest for around 3% and borrow at 4%?

The economics are different with BTL though, because the interest cost of financing the property will reduce the net income on which you pay tax. Effectively you have a 'tax shield' ; if say the mortgage interest was £100pm, and you made the mortgage and associated interest charge disappear, you would not actually get 100 in your pocket, as you would now be paying more tax. How much extra tax depends on your tax band but for a lower rate person, clearing a 5% mortgage only saves them 4% net interest and for a higher rate person, it only saves 3%. While on the other side, your NS&I inflation-proof savings interest is tax free and you really do get whatever it says on the tin.

So if your BTL mortgage is only 4% in the first place, your net saving from clearing the mortgage is going to be even smaller than the above figures where I used 5% to make the maths easy.. I take the point that variable rates could rise, but if you look at the price of fixed mortgages these days, nobody is predicting large rate rises in next few years.

If it is marginal, I would probably take the guaranteed inflation beating return and not worry too much about clearing the mortgage. The advantage of taking the renewal is that in a few more years you are likely to be offered another renewal. A guaranteed inflation hedge is something that the average man on the street, who doesn't already have one of these accounts, can't buy. The renewal deal offered, to maintain your principal in real terms, is a perk no longer being offered to new savers by the government or anyone on the high street.

With getting on for 90% equity in your BTL you have a pretty sound business there; if it were me I wouldn't make myself less competitive (compared to rival landlords) by throwing away my tax-efficient gearing. But everyone has a different appetite for risk and you might genuinely prefer to own the property for some psychological reason rather than have a bit of easily-covered debt on it.

VodkaSorbet

bowlhead99 wrote: »

The economics are different with BTL though, because the interest cost of financing the property will reduce the net income on which you pay tax.

Thanks for that, I've been trying to think the tax implications through but as it's all so marginal I can't really see a strong case either way (I think it works out something like £300 extra tax to pay per year if I were to clear the mortgage right now - I'm a lower rate tax payer).

The mortgage will be cleared in 4 years anyway by my normal repayments, so I'll lose the tax benefit then anyway.

I had decided to cash in, now I'm not so sure! Maybe I will take part of the cash out and roll the rest over for 3 years.

Thanks for all your responses.