ISA, Repayments and Stress

PeterJames123

Hi Guys,

Firstly I would like to thank you for taking time out and apologise for my lack of financial knowledge

My wife and I owe 26k to the builders of this house and needs to be paid back in 4 years (shared equity scheme)

If we don't pay it we are charged 1.5% interest in year 1 of total amount, year 2, 2.5% and so on starting from March of this year.

I have 17.5k saved up Premium Bonds (my entire life savings) but don't really want to give them that so I've been advised

Option 1) to remortgage (25 year term) for 26k and give the builders the cash that way. This means monthly my mortgage goes up by £113

Option 2)
I can give them £10k from my savings and remortgage for £16k, which means my mortgage only goes up by £67 and that way I have £7.5k still in my account.

Option 3)
But I've also been told to take out the £27k mortgage and open a cash ISA and move the money from my bonds into the ISA. The only issue with that is I can only open the ISA with £1000 and then monthly put in £200 maximum allowed a month. But am I right in thinking this would take 80 months to transfer all my bonds into my ISA as ISA's only allow you to pay in £200 per month?

Really so confused right now and not sure what to do. Any help would be greatly appreciated.

Stubod

The ISA Allowance for this year is £15,250 (each..ie £30,500 for a couple)...you should be able to invest / save this in one go....

For me I would use a much "savings" as you could to pay off "debts"....Premium bonds are not a good "investment". We have some but only put money in when we have exhausted stocks and shares ISA allowance.....if you want to hold on to a bit of cash, I would go with your 2nd option. Its painful to give up cash in the short term as you feel you are "spending" it and getting nothing back, but better to do that and "save" the monthly amount you would have spent in funding the loan in a SS ISA..my opinion.

Thrugelmir

Overpay the mortgage and build equity to release. Premium bonds are earning you a pittance. I'd use part of the money to reduce the mortgage now.

bowlhead99

If the 17k is your life savings you are right not to blow it all and have zero emergency fund for unexpected events in your life. So, good start.

First comparing option 1 and 2. Your preference for a larger or smaller mortgage - or zero mortgage and just owe the builder for another year - might come down to how much money you can earn on your savings by keeping them as savings, versus what the mortgage would cost or what owing the builder would cost.

You can stick £17k in a single Santander current account and it will pay 3% a year (more than twice as much as what your premium bonds pay). If you are willing to mess around with multiple bank accounts, you could get quite a bit more than that, because other banks will pay even higher rates on smaller maximum amounts of money. But for example if you and your wife both open up accounts (plus one joint account) with Lloyds, you can have three accounts each paying 4% on £5k. Some other accounts offer 5% but only on really small amounts per account. Either way, the amount you earn over a year on your £17.5k will be £500+.

By contrast, £17.5k of premium bonds will buy you 17500 entries to the monthly prize draw or 210,000 entries a year. With a 1 in 26000 chance of winning a prize, if you have a 'normal' amount of luck, you should win 8 prizes. Each of those prizes has a 98% chance of being £25, which gives you £200 total. Of course, with 8 separate prizes you only have an 86% chance that all of them are £25. If you're really lucky, one of them might be a £50 or £100. So if you were lucky you might get £225 or £275 instead of £200. Of course, you might get nothing at all, because you might win no prizes, it's random. At 8 prizes a year, it will take 143000 years to win enough premium bond prizes to expect to win the million pound prize, and if you're unlucky it could take 250,000 years or more. So if you want a 'thrill' of maybe winning a big prize you could always use the hundreds of pounds of spare extra interest that you get from using better savings accounts or current accounts, to buy a few lottery tickets on rollover weeks.

So anyway, after that distraction of premium bonds, which you should dump, you have the question of do you want £500+ of interest income from current accounts, while owing the builder 1.5% on his £26k which is only £390? At a basic level this seems fine - the simplest thing seems to be not to pay the builder at all, and leave it as something to look at next year when the builder's rate goes up and maybe the good bank accounts don't exist. Why sacrifice savings which earn 4-5% or borrow on a mortgage at 2-4% to pay off a debt to the builder at 1.5%?! However, if it is shared ownership, does the whole value of the £26k go up if your house price goes up? Because that would seem like something to avoid.

So if you want to get the cash together for the builder to pay it off, you are just looking at the rate you would lose by spending savings, against the mortgage cost. If the mortgage rate is less than 4% it is a no brainer to borrow all the money and keep your savings working for you, rather than give up savings to take a lower mortgage. Also, if you have some financial distress, lost job or whatever in a few years time, and really needed to hammer through your savings to make ends meet, then you might struggle to go and get a competitive mortgage rate in those circumstances - whereas if you get one now you can keep it as long as you can make the monthly payments on time.

So then we get to option 3.

What you seem to be talking about here with a maximum deposit of £1000 and £200 per month ongoing, is the new 'help to buy' ISA launched a few months ago by some banks and building societies. This is a lucrative scheme to help future 'first time buyers', where basically you put money into the account over time which earns a competitive interest rate, and then at some point you can cash out to give the money to your solicitor or mortgage company when buying a house, and the government will boost the account by a one-off 25% at that time. If someone started saving in this account and had £2000 in it next year, they would get a magic extra £500 from the government to help them buy their house. The maximum amount of free cash is £3000 though it would take a very long time to build up that amount.

However, you explained that you already have a house. If you own, or have at some point in the past owned, all or part of a residential property, you do not qualify for the account and you would not get any free money from the government. You will have to declare when opening up the account that you have never owned property, which is a bit difficult when your name is on the deeds of a house that you've been in for four years. The fact that you would eventually use the money to pay off debt to your builders is neither here nor there. This product can't be used by you. The way it could be useful is only if you are the house owner and your wife is not. Because although you couldn't get this product, she could, and then when buying a piece of it off you later, she could get some government money.

So, the special 'help to buy' ISA at 1000 to start and 200 a month is a complete red herring and is not for you. There are other 'normal' ISA products which can take up to £15k per person per year, as mentioned by other posts above - but the interest rates on them are low (<2%) so they are not worth using when you can get good rates on other current accounts, regular saver accounts etc, from many major banks.

PeterJames123

wow, absolutely stunned by the level of advice here, thank you so much.

Our builders agreement is 1.75% off the outstanding equity loan, the fee increases each year by the RPI + 1%.
Our house was worth £130k when purchased and now worth £140k

In terms of saving with 2 ISA's this year (my wife and I) is it possible to move £15k into one of them and 2.5k into another?
I keep reading maximum allowed is £15k but then they all seem to say most you can invest is £200 a month and maximum open is £1000.

Opening several high interest savings accounts seem like an excellent idea too. This way the £100+ per month extra which we will owe to the bank will be covered.

Thrugelmir

What's the rate of interest that you currently pay on the mortgage?

Our builders agreement is 1.75% off the outstanding equity loan, the fee increases each year by the RPI + 1%.
Our house was worth £130k when purchased and now worth £140k

Does the lender also not take a cut of the appreciation when the loan is redeemed?

DesG

PeterJames123 wrote: »

I keep reading maximum allowed is £15k but then they all seem to say most you can invest is £200 a month and maximum open is £1000.

That is for help2buy ISA's which you can't use as you are not a first time buyer now.

kidmugsy

bowlhead99 wrote: »

If the 17k is your life savings you are right not to blow it all and have zero emergency fund for unexpected events in your life. So, good start.

I warmly agree.

bowlhead99 wrote: »

You can stick £17k in a single Santander current account and it will pay 3% a year (more than twice as much as what your premium bonds pay). If you are willing to mess around with multiple bank accounts, you could get quite a bit more than that, because other banks will pay even higher rates on smaller maximum amounts of money. But for example if you and your wife both open up accounts (plus one joint account) with Lloyds, you can have three accounts each paying 4% on £5k. Some other accounts offer 5% but only on really small amounts per account. Either way, the amount you earn over a year on your £17.5k will be £500+.

Agreed. Note that the Santander account charges £5 p.m. but that OP can probably more than offset that by transferring to it his Direct Debits for water, gas, elec, Council Tax, and phone/broadband, on all of which it pays a rebate.

bowlhead99 wrote: »

There are other 'normal' ISA products which can take up to £15k per person per year, as mentioned by other posts above - but the interest rates on them are low (<2%) so they are not worth using when you can get good rates on other current accounts, regular saver accounts etc, from many major banks.

Spot on.

OP, one thing you could do is calculate what the average annual outgoings are for you as a couple. You might then decide that the minimum emergency savings you want to keep is half of that i.e. 6 months of cover. Add to that any foreseeable big expenditures due in the next few years - repairs to the house, replacing a car etc. You might find that you would be wise to keep most of that £17k in cash rather than tie it up with the builder.

Eco_Miser

PeterJames123 wrote: »

In terms of saving with 2 ISA's this year (my wife and I) is it possible to move £15k into one of them and 2.5k into another?

You could, or any other proportion with no more than £15k in one, BUT you shouldn't.
£17.5k in Santander, or 3 * £5k in Lloyds + £2.5k in Nationwide or various other combinations of current and regular saver accounts (see here) will pay so much more (and will be tax-free from April for most people).