Options: 10% tax free, 7% tax free, 11% taxable, 6% taxable

jamesd

prepperpig asked about overpaying on a mortgage but rather than giving full details there I thought it might be more useful to start a new topic about some of the options that can beat most mortgage interest costs, since many in this section might not be aware of just what's available out there. So, here are some options that come to my mind that those who are considering overpaying on a mortgage might consider:

10% tax free.

The Albion Venture Capital Trust is expected to pay around 7% in dividends tax free. 30% of the purchase price is refunded by HMRC so that's equivalent to 10% tax free. Refund is capped at the income tax actually payable by you in the tax year. This specific VCT does only asset-backed lending, so almost all of the money is secured on property or other physical assets. To learn more read these posts: URL="http://forums.moneysavingexpert.com/showpost.php?p=68123328&postcount=24"]1[/URL, URL="http://forums.moneysavingexpert.com/showpost.php?p=68151556&postcount=58"]2[/URL, URL="http://forums.moneysavingexpert.com/showpost.php?p=68189204&postcount=1411"]3[/URL, URL="http://forums.moneysavingexpert.com/showpost.php?p=68191790&postcount=1416"]4[/URL. You have to hold VCTs for at least five years or repay the initial 30% tax relief.

This particular VCT is now full for the 2014/15 tax year and expected to open again for 2015/16 around November, along with the main VCT season. The rest of their range is expected to close for 2014/15 at the end of September and reopen for 2015/16 early in 2016.

7% tax free

The Royal London Sterling Extra Yield Bond fund currently has a distribution yield of 7.09% and this interest is tax free inside a S&S ISA.

11% taxable

Ablrate currently has one loan on offer that's paying 11% and has recently offered some at 10%, 11% and 14%. 12% typically available via MoneyThing and SavingStream. Plenty of other P2P alternatives available paying 5-12%. All taxable at the moment, until P2P ISAs arrive, probably in April 2015, though some are available in SIPPs today. All of those mentioned are secured on physical property of some sort.

6% taxable

First Direct and M&S Bank (I think) do 6% regular saver accounts. Taxable but completely safe.

Before doing any of these things you should learn more about them but hopefully this post has served as a useful signpost to what I think are some of the most interesting options available today.

Updates 11 September 2015: I've added closure/new offering details for the Albion VCTs, more specific P2P mentions.

edinburgher

Thank you for this useful post. It's also worth pointing out that anyone paying basic rate tax can probably beat their mortgage rate in cash with no risk.

As you know, the internet is a wonderful place and despite your inclusion of a 'DYOR' statement, some people won't.

I would be very interested to see a brief follow up post with an explanation of some of the attendant risks, personally trying to figure out how the yield on the Royal London bond fund is sustainable.

Not sure if I'm looking in the right place, but is this SEDOL:
BG5GTJ6 ISIN: IE00BG5GTJ66?

*Edit: found my own answer, the majority of the holdings are 'junk' debt.

JimmyTheWig

You make it sound like a no brainer, jamesd.
But surely there's the old adage about past returns. How would those of us who don't know about these things know when and what to pay in to?

jamesd

edinburgher wrote: »

I would be very interested to see a brief follow up post with an explanation of some of the attendant risks

10% VCTs in general: there's always a chance that the VCT manager will break the rules and lose VCT status. If that was to happen the 30% tax refund would have to be repaid. Not very likely for the one I mentioned specifically because it's subject to more generous rules than newer ones. VCTs in general cover a wide range of risk levels. the one i mentioned is at the lower end of the risk range because it's all lending secured on property. No FSCS protection for routine variations in capital value and those will happen, though probably upwards on average, over a sufficiently long time.

7%: Bonds have varying capital values and interest payments, with no FSCS protection for the changes in value. The Royal London Sterling Extra Yield Bond fund is in the strategic bond sector so the manager has lots of flexibility over the credit ratings of the bonds used and at the moment a lot of the money is invested in high yield bonds. I chose this sector because it gives the manager flexibility to avoid bad areas, because high yield bonds are traditionally less sensitive to interest rate changes than high grade bonds and because those paying mortgages will be more familiar with interest than total investment returns, so I preferred bond fund where the interest is easy to point to. This particular fund happens to be the second best performer overall in the last three years in its sector and best over five years.

11%: lots of discussion of this around, try a search for Ablrate and my user name.

6%: standard regular saver accounts, full FSCS protection, limit on how much money can be kept in these.

edinburgher wrote: »

Not sure if I'm looking in the right place, but is this SEDOL: BG5GTJ6 ISIN: IE00BG5GTJ66?

Close. Same fund, different classes, yours is class Z, the one I linked to is class Y. The difference is fund charges, 0.59% for class Z, 0.85% for class Y.

edinburgher wrote: »

personally trying to figure out how the yield on the Royal London bond fund is sustainable. ... *Edit: found my own answer, the majority of the holdings are 'junk' debt.

About 40.4% in BB or below rated bonds and about 39.8% in unrated bonds. What the manager observes is that '“There are three unrated bonds in the fund’s ten largest holdings – two are mortgage debentures with first and over-collateralised claims on commercial property – while the third is regulated operating company debt within the £1.7bn market capitalisation Phoenix Group.” ' (page 2). You might find the whole article interesting.

JimmyTheWig wrote: »

You make it sound like a no brainer, jamesd.
But surely there's the old adage about past returns. How would those of us who don't know about these things know when and what to pay in to?

Investing isn't ever a no-brainer, not even if it's a case where someone you know is pointing out things that look interesting to them. One nice things about mortgage overpaying switching to investing is that the regular payments give plenty of time to clear before the amounts become large.

What I picked as interesting is things that have pretty good protection for the type of investment that they are and overall: asset-backed (secured on property) for the VCT and P2P and partly for the bond fund, which also is less vulnerable than typical bond funds are to changes in interest rates.

I'm also using two of the three things I've mentioned myself (the VCT and P2P) and would use the regular savers and perhaps the bond fund if I wasn't getting better results elsewhere.

It's really up to each individual to determine whether they think that I've pointed out things that look interesting to them, whether it's for experimentation to learn more about them in practice or just reading up for education about future opportunities. Nothing I can write can compete with a person learning and experimenting for themselves.

georgan

Hey jamesd,

intrigued by the pool of Albion VCTs, but an element of concern rises from the comparatively excessive fees, capped for Albion at 3%.

Let's take the example of Albion Venture Capital Trust which promises 10% of net capital invested (after 30% tax relief) in dividends. Do the 3% capped fees decrease this 10% to 7%? Are the fees paid from the dividend before it reaches the investor's account, decreasing therefore the net ROI? Or otherwise?

Assuming a 10% dividend, one gets their capital back in 10 years. If fees eat into dividends, this time gets to 14+ years. Of course there may be an opportunity to release your capital after 5 years through a buyback programme.

Opinions?

jamesd

Fees are a fact of life and the quoted returns are after fees, so you do get the 10%. I've had my first tax free dividend payment from my own Albion VCT investment and it's the expected just over 5% level for a dividend that is paid twice a year at a bit over 10%. Also had the expected payments from three others on their due dates, the rest not yet reached their first due date since my purchase.

The Albion VCT has now filled its 2014/15 allocation target and is not currently available for new purchases. The related Crown Place one that is expected to pay 11.16% is expected to fill before the end of September final closing date for the 2014/15 offers but is currently still open. This one is only about 50% asset backed. The remaining linked offers managed by Albion Ventures are still open and might not fill by the end of the year's offer.

Albion Ventures expect that there will be a 2015/16 offering of Albion Venture Capital Trust opening in late 2015, perhaps November, and another linked offer in early 2016, according to a phone discussion I had asking them about plans.

While the standard offer from Albion Ventures is for a minimum of £6,000 bought they told me that this is because they don't want to overheads of low amounts in individual shares and they would probably accept minimums of £1,000 per share, at their discretion. They are looking into how to adjust their description of their minimums to better reflect what they are really willing to do. The lower levels make it easier to fine tune tax planning near the end of the tax year, or for those with low remaining taxable income after using other tax breaks.

Meanwhile in the P2P area there are many options paying 12% routinely, taxable until the new Innovative Finance ISAs start in April 2016, assuming that happens as expected, and still taxable if not held within one (or a SIPP). I've recently been doing P2P investing at 14% flat, around 15% AER equivalent, and around 19% but the first of those isn't currently available - it's a couple of loans via Ablrate - and the latter is a beta one that is not generally available yet.

jamesd

An update on some of this:

Ablrate recently funded a £1.8 million short term aircraft loan at 13% taking less than a month to raise the money. Also has now wait listed a fully funded £600k 15.4% deal over five years that pays out only at the end. the only currently live new offer is 10% for a three year loan to a previous customer who repaid their earlier loan. Still about £40k to fill during the next seven days.

MoneyThing has been doing their usual range of interesting offers, adding loans secured on leased cars and some property development to their previous pawn offerings.

SavingStream has had a bit of a slowdown over the new year but seems now to have more normal deal flow at their usual 12%.

Plenty of other P2P firms around. In April 2016 many P2P firms are expected to offer Innovative finance ISAs that allow holding P2P investments for tax free payments, way better returns for the lack of tax than banks or building societies, though of course with investment risk.

I fairly recently added more to my VCT investments in the Albion VCT and expect to fully use my tax rebate eligible VCT limit this year.