Which account should I use to pay my mortgage deposit? US dollar or ISA?

zipp

Hi everyone,

We have finally found the first home of our dreams : )
Been offered a mortage and We are now in the process of transferring our deposit money into the conveyancing solicitors account in order to complete hopefully next week.

My question is this:
I can either pay my share of the deposit (50k) from money I have in Premium bonds and an ISA account - or - I can transfer $30,000 US dollars into a UK account making it possible to use less of my ISA money.

My partner thinks I should use the US dollar money as he says ISA's take such a long time to build up.

However the exchange rate is so poor at the moment that I feel I will not be capitalising on the dollar to GBP exchange and will be in effect losing money from that exchange. The conversion at the moment is it's currently 1.60 but has at times been 1.48 and in previous years even better.

Therefore, I would like opinions on which option you think I should use to pay my part of the deposit.
Need to transfer money asap.

Thanks so much for all your help. Zipp

grumbler

So, do you want opinions on the exchanger rate going up or down?
If so, you are definitely in the wrong place.

Personally, I wouldn't touch ISA and gamble on the rate going in the direction I want.

zipp

grumbler wrote: »

So, do you want opinions on the exchanger rate going up or down?
If so, you are definitely in the wrong place.

No I understand that the rate is currently poor for converting US dollars into pounds.

That is precisely why I am posting in this section of the forum.
I need to either

a) take the money from my ISA
b) convert my US dollars to GBP at a low conversion rate (therefore not making the best of my US dollars but leaving more in my ISA account

zipp

zipp wrote: »

grumbler wrote: »

So, do you want opinions on the exchanger rate going up or down?
If so, you are definitely in the wrong place.

No I understand that the rate is currently poor for converting US dollars into pounds.

That is precisely why I am posting in this section of the forum.
I need to either

a) take the money from my ISA
b) convert my US dollars to GBP at a low conversion rate (therefore not making the best of my US dollars but leaving more in my ISA account

grumbler

zipp wrote: »

That is precisely why I am posting in this section of the forum.
I need to either

a) take the money from my ISA
b) convert my US dollars to GBP at a low conversion rate (therefore not making the best of my US dollars but leaving more in my ISA account

So, would you ask questions if you knew for sure that the rate will not change in the foreseeable future?
Unless you are getting very high interest on your USDs, that is very unlikely, the only reason for taking money from ISA can be your expectations (=gambling) that the rate can change in your favour.

Is this the right place for asking for opinions/reassurance that your expectations are right?

bowlhead99

zipp wrote: »

No I understand that the rate is currently poor for converting US dollars into pounds.

It is poor if you are looking at paying a dollar and sixty cents to buy a pound compared to paying a dollar and fifty five cents a year ago or a dollar and forty cents if you perfectly caught the bottom of the market crash in 2009.

It is GREAT if you are comparing it to paying a dollar, and another dollar, and another ten cents, for every pound five years ago. Here is a ten year chart. Does 1.60ish look too bad?




An ISA will shield income from cash or other assets (e.g. funds, bonds, shares) within the wrapper from UK income and gains taxes for every year for the rest of your life. That's potentially a lot of taxes saved while you sit around enjoying your dream house. Your partner is right that if you take more cash out of them than you really need to, it will take a long time to build back up.

Of course, if you weren't otherwise going to have enough spare money over the next few years to use up your annual contribution limits, then you will have the space to fill them back up over the next few years and so it's only a temporary loss of your tax shield. But if you have plenty of income coming in that was going to use up your next few years of allowances anyway, then taking this cash out is perhaps a poor choice because you'll never fit it back in.

You haven't mentioned whether the reason you have lots of USD is because you're a US expat who's emigrated here. If that were the case, the ISA isn't quite as good to you as it is to a native Brit, because you're presumably paying tax on your worldwide income to the IRS anyway. So maybe it's not as much of a big deal. Still, not many people would take their money out of the tax wrapper if they had some perfectly good cash sitting outside it.

Do you have any future known USD expenses or liabilities or a plan to move to the US at some point? If so, maybe you could hang on to the dollars to hedge against the dollar strengthening and you needing to buy a bunch of dollars in the future. But if you haven't, holding dollars at low interest rates seems like a pure gamble (see graph above).

Of course, if you have a strong 'gut feeling' that USD is going to strengthen, one option is to use the dollars on the house, keep your ISA as full as possible, then move some of the existing cash ISA funds into a stocks and shares ISA and buy some funds that invest in US stocks or bonds. If your feeling on rate movements is right, even if some of the companies are less successful than others, hopefully they will become more valuable in sterling terms and you will be a winner. This obviously has more risk than holding pure dollar cash but is a way to participate in dollar gains over the longer term - if your crystal ball tells you the dollar is going to strengthen and you are able to jump off at the right point.

zipp

Thank you for such an in depth reply.

I'm not an expat so do benefit from the wrapper. I missed the great USD to GBP rates of August this year (1.48) and so wanted to hold out for a better rate of conversion if possible.

I was waiting for the dollar to strengthen after potential FED tapering and various US announcements which had been predicted. However, things didn't go as expected so I'm kicking myself for losing out.

What you're saying makes sense but if I withdraw 30k in USD now, I'm essentially losing a few thousand pounds as opposed to if I withdraw them at the 1.48 rate. That's why I was holding on.

For the sake of argument, if I go the USD conversion route at this point and settle for a few thousand less than I would get if I were to wait for the dollar to strengthen, how would the money left in my ISA at such low interest rates be of more benefit than the few thousand I would be making at better conversion rates on my USD in the future?
I know it's a gamble but if I hold on until next year and find that the rates are better, then it would be a significant rise in what I'm getting now for the USD to GBP conversion.

Sorry if I sound like an idiot : )Just want to be super clear before I make the transaction
Zipp

bowlhead99

Of course getting an 8-10% rise is better than saving a percent or two of tax over the next year or two.

The point is, your only basis for thinking a pound is only 'worth' 1.48 is that you saw that rate for an odd couple of weeks in March and July before it strengthened again. The point of showing you the graph, is so you can see there is no such thing as a 'normal' rate, and if there is such a thing, 1.48 isn't it. Before this March you hadn't seen 1.48 since 3 years earlier, May 2010, Before that month, you hadn't seen it since April/May 2009. And that was at the end of a 6 month period of relatively low rates which followed a block of time where it didn't dip below 1.75 in a single week for about five years, with a worst-case scenario of you having to pay $2.10 to buy a pound if you needed it in a hurry.

You could go back 40 years and see the same picture - huge blocks of time where 1.50-1.60 would have been a dream rate. That block of time from '03 to '08 where it stayed in the 1.75-2.00+ range for five years after a recession - are you happy with that happening for five years after the current recession, and just holding on to the dollars at minimal interest rates until you can hopefully convert them back for what they're worth today?

The $30k at 1.6 is 18,750, while at 1.48 it would get you only around £1500 more. But at 1.74 you'll get £1500 less. You admit it's a gamble. Of course you can say that if the rate moves in your favour "then it would be a significant rise in what I'm getting now for the USD to GBP conversion". By the exact same logic, if it moves against you it would be a significant loss in what you're getting now.

So: you have waited for the announcements about Fed tapering and US announcements about their economy, and they haven't gone in your favour. There may be some announcements in the future that strengthen the USD, weaken GBP. But there may also be some announcements in the future that strengthen the GBP, weaken USD. Both countries release economic data weekly and make rate announcements monthly and tax announcements and war announcements etc on various different timescales. The current rate is not poor if you look at the whole history of the rates for as long as you've been alive.

It is only your cherry picking your time period, and perhaps a naive view on world economics driven by media soundbites, that makes you think you are gambling to win a significant amount of money rather than gambling not to lose a significant amount of money.

I'm not saying you are wrong, because of course dollars could strengthen. I'm just pointing out you are not as right as you think you are, because you seem to be missing the point that they could weaken. Your partner has come up with the sensible approach and you have come up with the gambler's approach. As long as you're both happy with the solution you land on, that's fine. Nobody here can tell you the right answer to a coin toss but hopefully you now know what sides the coin has.

zipp

I really appreciate you taking the time with this question.
I of course understand that there is no such thing as a 'normal rate'

I agree that 1.48 is not a frequent happening but the fact that it does happen just made me wonder if I should try and hold on to them for a better rate.

I can hold on to my dollars without needing to break in to them for a while so I don't think I'm being super risky holding on for a lower rate.
However, as you say the balance could swing and the rates could go higher for an extended period so of course I need to weigh all this up,

My partner is very sensible and I should have taken his advice when he told me to transfer the dollars in August.
Now I guess I will but I do have a strong feeling that the dollar will strengthen.
However, you're right, it's a gamble and I'm not really a gambler so thanks for helping to answer my question.

I absolutely understand both yours and my partner's point of view I just wanted to check that there were no other factors I should consider.
Zipp