Re-mortgaging to put into savings

ChrisJ1988

Hello all,

Looking for some advice and wanted to know if what I am thinking is right.

So here goes:

I currently have an outstanding mortgage balance of £78k with a house value of £161k so roughly 50% equity. I have a re-mortgage offer of 2.09% fixed for 2 years due to start June 1st with the monthly payment being ~£900 a month (cant remember exactly). The full term of the mortgage is 7.9 years.

So my plan is to take out £25k equity leaving me with a mortgage of £103k (~63%) equity and extend the duration of my mortgage by a couple of years so my monthly payments remain ~£900.

If i didnt take out the £25K equity based on an interest rate of 2.09% my yearly interest would be £1630

If i did take out the £25k equity my yearly interest would be £2152 - £522 a year more or £42.50 a month.

If i put that £25k into my funding circle accounts based on a return of 7% this would make me £1750 in the first year (forgot tax deductions as they will not be applicable)

So as far as I can see I would be £1228 a year better (in the first year) off by increasing my mortgage.

Obviously I understand that investments arent guaranteed but I am willing to take the risk.

Failing that I could spread the money across high interest bank accounts for a smaller return.

Am I missing something and there is a major flaw in my plan or is this easy money?
I am assuming I would re-mortgage after the 2 year fixed period for around the same current rate of 2.09%

Thanks for reading and look forward to comments or questions.

Cheers,

Chris.

bowlhead99

The obvious questions are:

If i put that £25k into my funding circle accounts based on a return of 7% this would make me £1750 in the first year (forgot tax deductions as they will not be applicable)

Why would you forget tax deductions. Are you not a taxpayer or are you just doing your lending via a single platform ISA. Have you considered other deductions like potential bad debts? No such thing as a free lunch.

Also, the 2.09% rate - is that 'fee free' or is there a setup cost which will eat into your returns?
Bank accounts would at least be 'liquid' so you could get the money back quite easily to pay off the money in 2 years when your preferential rate expires or the rates cease to be so generous. Still, the premium you'd be getting over your 2% borrowing cost is not massive ; a portfolio of bank accounts doesn't pay anything like the 7%.

Am I missing something and there is a major flaw in my plan

how about:

I am assuming I would re-mortgage after the 2 year fixed period for around the same current rate of 2.09%

Why assume that? Rates are currently the lowest they have been in a hundred years. With price and wage inflation, you should not expect that to continue indefinitely.

Still, you've said you're willing to "take the risk"; if all risks are acceptable, the plan is flawless.

ChrisJ1988

Hello bowlhead99 thanks for your reply

Funding circle will soon be offering ISAs with an estimated return of 7% after fees/bad debt ect. The 2.09% is fee free yes so no other costs.

I am assuming that I would get a similar rate in 2 years time as currently the bank of england interest rate of 0.5% is expected to stay until late 2019, even if it did increase before then I i had to take out a mortgage at a higher rate I would expect the rate I lend my money out to businesses on funding circle to increase also, I wouldnt expect one to grow faster than the other.

I didnt know if there was anything else that I had missed or potential drawbacks.

Thanks,

Chris.

bigadaj

The big issue is the misalignment if risk.

P2p means there is risk to your capital, if the counterparts defaults then you lose some or all of your capital, and can't then pay the interest or capital at the end of the mortgage term.

High interest banks accounts don't have the risk of capital loss, but you have a lower return.

If it were me I'd be maxing out the high interest before using p2p, or potentially splitting it, but everyone has a different capacity for risk.

Flobberchops

This works on the same principle as taking out a loan to put money in investments - the loan costs you, say, 5%, and the investment returns 8%. So you make profit on the difference but at the cost of assuming the risk. This is something I've been sorely tempted to do myself now that the "perfect storm" of low borrowing rates and high P2P returns exists!

In OP's position 2.09% is a very tempting proposition. If you have the risk appetite, you could make some decent money. Obviously just make sure that in the nightmare scenario where every last one of your P2P loans defaults you'd still be able to afford mortgage repayments.

AlanP_2

We have an Offset Mortgage that is at 1.99% and keep a substantial amount of cash in hand that could wipe out 2/3rds of outstanding mortgage so are effectively doing what you are considering in many ways.

Of that CASH we have 15% in P2P earning ~10% pa, 75% in interest paying Current & Regular Saver accounts earning ~5% with the last 10% in a standard savings account offset at the 1.99% and slowly being moved across to the Regular Savers.

Blended rate of about 6% to date, so about a 3x return compared to paying it off the mortgage but with a "stop loss" in place for capital losses with the P2P element.

As well as making the money work harder we wanted to keep a fairly large available cash pot as we have 3 children in their 20's that are likely to get married / buy houses over next few years.

Thrugelmir

ChrisJ1988 wrote: »

Funding circle will soon be offering ISAs with an estimated return of 7% after fees/bad debt ect. The 2.09% is fee free yes so no other costs.

The return is what the market prices the risk at. Bad debt is more or not often all or nothing. Once lost capital won't be recovered.

Dan83

I think it sounds like a fantastic plan, especially if you can do what you intend to do, any not be tempted to dip into the £25 for anything.

Although the 7% in funding circle sounds great, you can get 12% in saving stream. All P2P is a risky move in this situation in my opinion.

I'd be more inclined to put it in high interest current accounts, then maybe use the interest to invest in funding circle, that way your £25k is 100% safe, should you ever need to pay it back off your mortgage.

Good luck with it all and let us know how it goes.

ChrisJ1988

[QUOTE=In_OP's_position_2.09%_is_a_very_tempting_proposition._If_you_have_the_risk_appetite,_you_could_make_some_decent_money._Obviously_just_make_sure_that_in_the_nightmare_scenario_where_every_last_one_of_your_P2P_loans_defaults_you'd_still_be_able_to_afford_mortgage_repayments.[/QUOTE]

I have thought about the nightmare situation of losing the whole 25k. I would increase my mortgage term to keep the monthly payment as it currently is, I am 28 earning around 60-70k so in theory it wouldnt affect me short term and long term I would of learnt a valuable lesson!

jimjames

Thrugelmir wrote: »

The return is what the market prices the risk at. Bad debt is more or not often all or nothing. Once lost capital won't be recovered.

Unlike stock market based investments where if you are invested in a fund the price will generally rise back again in time. Obviously individual shares can be all or nothing though.

I could have overpaid my mortgage but invested instead. Now have 3x my mortgage balance in a S&S ISA and still got almost 10 years to go. When mortgage rate is just over 2% I can't see any reason to pay it off.

nb73

As others have said, it's all about gearing and risk. Gearing magnifies risk so that ehen you are highly geared, a small change in the gross value of your assets can make a large change to your net worth.

I have no experience of P2P but have used leverage to acquire property and stocks. It's a gamble and can go either way. My (heartfelt) experience is that in considering a more leveraged position, it's wise to map out all possible outcomes & make sure you'd sleep at night with the worst ones.