Sensible investment of £200k for 5 years

Sandman15

Edit: the title should read 4 years!

I have recently come into a windfall of around £180k. Combined with other savings I have around £215k in assets - mainly cash, with a few stock funds. My intention is to buy a house in 4 years time when I move back to the city I plan to permanently settle in - I will be renting in a different city until then. The current price of the type of property in the area I am looking to buy is around £225k (a flat in Edinburgh).

My goal is to have enough so that in 4 years time I can purchase the property outright, and have at least £50k for renovations, furniture etc. and reserves - so £275k plus whatever the value of that type of property has increased by in the next four years. So perhaps £300k. I am likely to save around £40k in the interim, so that leaves me with around £45k to make from my investments in the next 4 years.

I calculate this as a return of 4.9% on my £215k for four years, or a slightly lower return when taking into account the return on the amount I will save over those 4 years. I would like advice on the best way to make this kind of return while minimizing the risk I will have less than £300k in 4 years time, as I would not feel comfortable buying my home with less than £50k left over, and I would rather not take out a mortgage or wait longer than 4 years. Any advice appreciated on the best type of investment to allow me to achieve my goal, or if anyone can highlight flaws in my thinking I would also be grateful.

Thrugelmir

Sandman15 wrote: »

E if anyone can highlight flaws in my thinking I would also be grateful.

Your thinking is back to front.

You want to take no risk and not have a mortgage.

Therefore you have £x to start with. You expect to save £x.

Taking bank deposit interest rates you'll earn £x in interest.

Combined together that's your budget to spend. Whatever it will buy you. There's no magic money trees as far as I am aware.

Mistermeaner

High interest accounts etc offer guaranteed interest but on limited amounts, not your full 200k, plus interest is taxable but could be a safe bet for some of your money

There are various fixed rate fixed term products you can pit money in, again taxable so you won't get near your 4.something %

Isa are tax efficient but limited fixed returns and limited amounts you can put in

Stock market / bond market is too risky with your short timescales.

If I was you I would max high interest current accounts , info available on this website, I think you will get about 2-3% guaranteed after tax and your capital is safe, this should take of 70k.

You say nothing about pensions - putting money into a sipp would be highly tax efficient but obviously locks it away way past when you need it. It may be better to put money in your pension for tax Benefits and long term growth and borrow more today.

If you are prepared to take a mortgage you could fix at a lower rate of borrowing than the return you want, avoid the property appreciation problem and get the pension benefits.

Why not take out a btl mortgage today, using some of your cash as a deposit, have a tenant pay some of your mortgage and avoid the appreciation in property value, save 70k in cash and put a good lump sum in a pension.

If you feel a bit more like gambling you could put more into s+s isa with a view to paying your mortgage off early with some left over.

Sandman15

Thrugelmir wrote: »

Your thinking is back to front.

You want to take no risk and not have a mortgage.

Therefore you have £x to start with. You expect to save £x.

Taking bank deposit interest rates you'll earn £x in interest.

Combined together that's your budget to spend. Whatever it will buy you. There's no magic money trees as far as I am aware.

Thanks for the response, but I'm afraid I don't really understand it. Obviously there is always risk associated with an investment and that goes without saying - if I could get a risk free investment that would give me the return I wanted then I would not be asking for advice here, would I? Your comment about a magic money tree seems rather condescending... perhaps you should be searching for a magic etiquette tree?

I'll have a go at rephrasing what I am asking. I would like advice on the type of investment that would be suitable given I am looking to buy a property in around 4 years, in a market where property is likely to appreciate in price by an unknown amount, and I am looking for returns above what can be found in bank deposits but below long term stock returns. What type of investment would be most suitable over the a four year time frame given these criteria?

george4064

You could consider P2P lending, at least for some of your cash.

Zola is the main player in the P2P market.

Sandman15

Mistermeaner wrote: »

High interest accounts etc offer guaranteed interest but on limited amounts, not your full 200k, plus interest is taxable but could be a safe bet for some of your money...

Hi. Thanks for your helpful response. I am already contributing to a reasonably generous pension scheme that tops up my contributions, and overpaying slightly to make up for some lost contributions during my twenties, so I think I am in reasonable shape pensionwise.

I have a couple of decent paying current accounts - Santander123 up to £20k at 3%, Flexdirect up to £2.5k at 5% and TSB up to 2k at 5% (off the top of my head). I was not aware of any particularly other generous current accounts - which should I be looking at to get up to the £70k figure?

I take it from your post that your advice is to keep the money in extremely low risk investements and accept I will have to take out a small mortgage? I suppose that would not be terrible - but my guess would be that interest rates will likely be much higher in 4 years time so it will cost me a bit...

Mistermeaner

No my advice is take the mortgage today to make up whatever shortfall you have.

You have enough for a huge deposit and can fix the borrowing rate far lower than you guarantee in savings and you remove the appreciation risk.

It's a no brained really.

Borrow and buy today, move in in 4 years. Even if you leave it empty with no remnant you'll be better off.

Nb your mortgage term can be 3-4 years if you want - doesn't have to be 25 years

mvarrier

I would max out the high interest accounts and then use P2P lending for a portion of the remaining. Retesetter is pretty solid, with a provision fund to (hopefully) cover losses and you can lend on a three year term. Saving stream offers 12% against asset (property or land) based lending but obviously the higher rate could mean more risk. Funding circle is probably the easiest site to achievable good diversification in loans with large sums of money and 7% is fairly easily achievable.

Thrugelmir

Sandman15 wrote: »

Your comment about a magic money tree seems rather ... perhaps you should be searching for a magic etiquette tree?

Nothing condescending intended in my comment. Reward comes with taking a risk in order to generate a return. Taking a risk means one has to accept the downside. Achieving a net yield of that level is simply not going to happen. Appreciate that you don't like to hear this because it doesn't fit in with your plans. But I wouldn't recommend anything risky if your plan is to be mortgage free. Something which I believe to be eminently sensible.

PS. Magic money tree is a widely used expression. There's no such thing as free money.

grey_gym_sock

IMHO the main problem is that, even if you follow a strategy with a decent chance of making 5% (while taking some risks), who knows what flat prices in edinburgh will do in 4 years? they could be up 50% or more; they could fall; etc.

i'm not sure that you can properly hedge yourself against rising edinburgh flat prices now except by buying now. though i can well understand that you may not want to get into BTL (especially in a city you're not currently living in).

you would have more flexibility if you were prepared to consider taking out a small mortgage when buying.

there are a number of corporate bonds paying 5% or so, and due to be repaid in about 4 years. that is a possible way of trying (but not necessarily succeeding) in getting about 5% a year. the only major risk with that is that the companies go bust and can't pay what the owe the bondholders - but that could happen. note that, if you bought bonds due to be repaid later than your timescale (i.e. after more than c. 4 years), then you don't know how much you will be able to sell them for after 4 years, so there is an extra risk in that case, compared to bonds of about 4 years remaining term. though if you sell a bond in about the last year of its term, the price is usually relatively stable.

P2P lending is also possible. lending terms are usually well under 4 years, anyway. different P2P platforms pay very different rates of interest, and carry different risks; you would think the highest rate should go with the highest risk, but that may not always be the case.

FWIW, i hold some corporate bonds, and am considering P2P lending.

it is very debatable whether you should put money intended for property into risky investments other than property. however, the above suggestions are at least more appropriate than putting it in shares.

Eco_Miser

Sandman15 wrote: »

I have a couple of decent paying current accounts - Santander123 up to £20k at 3%, Flexdirect up to £2.5k at 5% and TSB up to 2k at 5% (off the top of my head). I was not aware of any particularly other generous current accounts - which should I be looking at to get up to the £70k figure?

Club Lloyds £5k @ 4% (and £400 pm regular saver also 4%)
Bank of Scotland Vantage £5k (times 3), Tesco £3k (times 2) both at 3%. With the three you mention, that's £50.5k, AFAIK the most currently possibly for a single person. (A couple can get £130k) There's also regular savers with TSB, FD, M&S and HSBC worth having.