Loan to buy pensioner bonds

bjbyorkshire

I have a substantial isa due to mature on 31st July this year. Also£20,000 in Santander 123 account.

I have never had a loan before. Hubby and I earn £2400 per month from Pensions etc. I am considering buying 2 x 3 year pensioner bonds using the Santander money but then it effectively stops all the interest and cash back on this account.

I rang Nationwide last week who did what he called a soft search and said it was likely that from the details I gave that we, husband and I jointly, would be approved for a loan of £14,000 at 3.6 percent as an existing customer. The loan would be payable back over 1 year at £1189 per month with no set up fee and £55 to pay the loan off early, ie after the isa matures.

This would be the max amount I could borrow in both our names so I would need to use £6000 from the Santander account to put the full £20,000 into the Pensioner 3 year bonds.

The interest is 4 percent over 3 years less tax as at present we are both tax payers. There would be less interest from Santander, at present 3 percent, but this money would be put back in after the isa matures at the end of July.

Before anyone shouts at me about how lucky we pensioners are, that yes we are lucky to be in this financial situation, but I really just want confirmation that my idea is sound and if anyone could do the maths re the interest I would be most grateful before I go ahead with my plan.

It seems such a shame to miss out on the Pensioner bond as this ends on 17 May and my isa is not available for 2 and a half months after that.

Thanks if anyone can advise.

ViolaLass

4% minus 20% tax is 3.2%, which is a lower rate than the loan.

bjbyorkshire

Thanks for the quick reply but it's not quite so simple.

The pensioner bond interest will accrue for 3 years wheras the loan will only be payable over about 3 months.

It is logical to me to do this but I'm worried as Im not familiar with loans that I'm missing something vital.

catwoman73

Wouldn't it be better to use the money from your 123 account and replace it when you ISAs mature in July?

matt-comparison

My rule of thumb would say that unless you can get financing in exceptional ways for a very low interest, you should not be taking loans in order to finance an investment. The market behaves in the same behavior both ways, and you're paying the middle men on both ends. My 2 cents.

TartanSaver

bjbyorkshire wrote: »

Thanks for the quick reply but it's not quite so simple.

The pensioner bond interest will accrue for 3 years wheras the loan will only be payable over about 3 months.

Your Santander pays 3%, which is 2.4% net. So it's actually worse than suggested above. You'll still get your cash back:

"To get cashback on your household bills and interest on your balance, just follow these steps:
Pay a monthly account fee of £2.
Fund the account with £500 a month (excludes internal transfers). A minimum balance of £1,000 is needed to receive interest.
Set up at least 2 Direct Debits. You'll get monthly cashback on selected household bills you pay by Direct Debit"

From the Santander website. Since you're getting cash back at the moment, you'll be meeting the conditions.

The only "cost" will be losing the interest on any low balance. The loan will not offset this, it will only cost you more. -1.2% interest is still worse than 0%! And that's before the £55 fee.

bjbyorkshire

Thanks to the last posters.

I am already fulfilliing the terms of the Santander account up to the maximum £20,000. The monthly interest is in the region of £40 per month plus the cash back. So, I need to leave in £1000 to run the account, I actually thought it needed £3000 to get 3 percent plus cash back, I will look at this. (Just looked and the Interest is 3 per cent on amounts between 3 and 20,000).

My thinking was that to maximise the NS&I account for 3 years and still keep the Santander account maximised that perhaps the interest payable on the loan would be less than the 2 interest amounts. If you understand my thinking!

It is beyond me to actually do the maths on this one.

All of you seem to agree that the loan for a short time is a bad idea so thanks for your advice.