advice needed

ian501

hi all my wife and i have £35k between us in premium bonds.these have performed poorly over the last twelve months and we are looking to invest elsewhere.we have a 100k mortgage which we can manage to pay monthly.we simply have no idea what to do,pay 35k off our mortgage or invest the money.any advice welcome

dipsomaniac

a premium bond is just a prize draw. you have no guarantee of receiving a prize.

as for the £35,000 it depends what you are investing it for?

as a general rule. you need an emergency cash fund of 3-6 months salary. this should be in a high interest easy access account. you then need to be looking at using a pension and your £7,000 annual isa allowance to build a balanced portfolio for any future needs.

invested properly (and having the right mortgage) the return on your investment should exceed the interest paid on your mortgage.

isofa

Depends on a number of factors and questions.

What rate is your mortgage, could you do better with a return of 6%+ on 35K savings?

With 100K mortgage I certainly wouldn't waste the 35K in PBs, better to invest elsewhere for a guaranteed return.

What rate of tax do you pay, does your wife pay less tax than you?

Mortgages are in effect negative investments, that's why I want to clear them first before investing, but that's just my take, many others may say invest the money in a risk free way (high interest account/bond etc)...

ian501

my wife and i are both basic rate tax payers.the money to be invested was an inheritance which we never had before so won`t miss if it`s tied up for a few years,although this is the only savings we have.we have a fixed rate (4.99%)mortgage which has twelve months left to run

isofa

High interest instant access accounts, such as those at say 6.2% gross interest rate equates to 4.96% net (for you as a basic rate tax payer). So in a year 35K put away will give £1736.

But you have a 100K mortgage at 4.99% rather than a 35K one at 4.99%

So it makes some sense to reduce the mortgage, after all that'll reduce your monthly outgoings, and you then will have more spare cash. But if it's the only savings you have, you probably want to keep an emergency fund of say £5K left over in a high-rate instant access account, and put the rest into the mortgage.

That's just my opinion, as I'm of the opinion to get debt free as soon as possible!

No doubt you could risk the money in funds and get a better return, but the money would be at risk (invested in stocks/shares etc), which really is only worth considering if you can afford to loose x amount and want to invest over a long period.

isofa

PS have you both used your 3K cash ISA allowance up for this tax year?

If not, for your emergency fund, I'd put 3K away each into a high-rate, instant access cash ISA, such as the NS&I Direct ISA currently paying 6.3%, and that's tax free, so it's 6.3% regardless of your tax bracket.

So for each of you putting 3K into an ISA at this rate will generate £189 interest per year, so totalling it up on the 6K between you, you'd get £378.

dunstonh

No doubt you could risk the money in funds and get a better return, but the money would be at risk (invested in stocks/shares etc), which really is only worth considering if you can afford to loose x amount and want to invest over a long period.

Taking a risk doesnt mean having to jump 100% into the stockmarket. There are other lower risk based areas to consider and you can dip your toes in gradually leaving yourself a cash buffer to suit your risk profile.