Borrow to fund an ISA 2017/2018 inwards

ffacoffipawb

I normally transfer money from taxable savings into my S&S ISA on 6 April every year.

Sadly I don't have the funds to do this now.

Is it sensible to borrow against my offset mortgage to fund the ISA for 2017/18 and 2018/19.

Mortgage balance is £1 (not a typo) with £129,999 drawable.

I can repay the two lots of £20,000 (two years of ISAs) from my PCLS in July 2019 when I will be 55 (and also fund the 2019/20 ISA).

I am pretty much at the LTA pension wise (£300K defined benefit from 2029 of spprox £15k p.a. plus £700k money purchase SIPP available July 2019 where I will take the £175k PCLS only). Still msking nominal pension conts to get the maximum employer match.

Mortgage rate will be 3.5% (firstdirect offset) and would probably buy investment trusts with a similar dividend yield.

It seems sensible to borrow to invest doesn't it?

masonic

It's really for cashflow, so it's not the same as borrowing to invest with leverage.

I'm doing something similar (albeit on a smaller scale) using a 0% credit card at the moment.

bowlhead99

I'd strongly consider doing that. With a large amount in pension money that you are not looking to grow (because it costs you tax to draw it), the goal over the coming years is to stuff as much money into non-pension tax-free assets as possible.

If you don't use the 17/18 and 18/19 ISA allowances you can't ask for them later, and you have enough pension money to fund forseeable future years' ISA allowances. So you end up with £40k (and whatever the £40k might have delivered in growth but instead grows inside the pension) stuck outside ISAs unwrapped, in addition to having the next couple of years' growth be partially taxable as you extract it from the pension.

It's not a massive problem to have £40k+ sitting outside ISAs because capital gains and dividend income and interest income all have their own annual allowances so you can probably manage that without paying much or any tax - but as you have plenty more money to come from the pension over time, it is perhaps quite useful to buy yourself that flexibility for a couple of years of mortgage interest now.

There would be other solutions to it though. For example you could take that £40k+ which you later extract from your pension and can't fit into your ISAs (because of not grabbing the next couple of years' allowance) and spread it around a few venture capital trusts instead - higher risk, but tax free income and growth plus upfront tax relief. But that sort of stuff is a red herring: because if you had done the ISA now you would still have the flexibility of later taking the money out of ISA and doing VCT, or leaving it in the ISA - whereas if you didn't grab the ISA allowance now you would not have the choice and you have one fewer option available.

So - imho - if you have a sensible and justifiable reason to borrow the money, and you have a clear and low-risk way to pay it back in a known timescale (TFLS on the horizon), then it's fine to do it.

Some people will tell you, hey don't borrow to invest, there's no guarantee the gains from your investment will beat the mortgage so don't do it, don't do it, it's a risk and it might cost you money. Well, not everything you do in life is to save money and avoid costs or debt. It can be to buy flexibility. In this case, as Masonic says, you're just buying some cashflow early to take an advantage of an opportunity.

For example, if your mortgage wasn't an offset mortgage you would have the choice of entirely paying it off and having no cash in the bank, or only paying some of it off and having a bit of cash left in the bank. Some would tell you to definitely clear the mortgage because you save the maximum amount of interest. But it is incredibly useful to have cash in the bank for emergencies and opportunities rather than be saving a bit of mortgage interest but having no flexibility or emergency fund.

Bottom line is: cost it; make sure you've worked out the plan to pay it back; look at the pros and cons of opportunities and future tax savings etc if you grab your allowance vs how you would use your pension if you didn't do this. You may well conclude that it's worth doing and I wouldn't want to be the one to tell you not to, because the plan has merit.

kidmugsy

ffacoffipawb wrote: »

Mortgage rate will be 3.5% (firstdirect offset) and would probably buy investment trusts with a similar dividend yield.

Couldn't you start by swapping to a much cheaper mortgage, releasing £40k on the way?

Lokolo

masonic wrote: »

It's really for cashflow, so it's not the same as borrowing to invest with leverage.

I'm doing something similar (albeit on a smaller scale) using a 0% credit card at the moment.

A question on this as I am in slightly the same position. With no debts, a largish credit card limit with offers and only really cashflow issue.

How did you transfer it to the ISA? As in, with my CC I get 0% offers in cash and purchases. When you deposit into the ISA was this done as a money transfer (my offers are usually 0% money transfer but with a 3% fee), or a purchase?

bowlhead99

You'll struggle to make an ISA or pension contribution on a credit card as they should be coming from your own cleared funds (bank transfer or debit card) rather than from a lender (credit card).

The main options are:

- Put all your day to day spending on credit card, to free-up your current account cash to make the investment via debit card or electronic bank transfer or cheque or direct debit; and then clear that credit card's balance via a balance transfer from another card offering 3+ years interest free for a nominal fee.

- Put all your day to day spending and big purchases on a interest free purchase credit card if you can find one with a really long payback period (they're often shorter or perhaps higher fee than balance transfer deals), thus freeing up cash in your current account to invest from that, as above.

- Money transfer to your current account to give you a pile of spare cash in that location, and then invest via debit card or electronic bank transfer or cheque or direct debit as above. Again, the interest free period or size of free might not be as good as for a normal balance transfer process where your new credit card company is winning business from a rival credit card company (they love giving lucrative offers to win customers from rivals).

Jhoney_2

bowlhead99 wrote: »

I'd strongly consider doing that. With a large amount in pension money that you are not looking to grow (because it costs you tax to draw it), the goal over the coming years is to stuff as much money into non-pension tax-free assets as possible.

If you don't use the 17/18 and 18/19 ISA allowances you can't ask for them later, and you have enough pension money to fund forseeable future years' ISA allowances. So you end up with £40k (and whatever the £40k might have delivered in growth but instead grows inside the pension) stuck outside ISAs unwrapped, in addition to having the next couple of years' growth be partially taxable as you extract it from the pension.

It's not a massive problem to have £40k+ sitting outside ISAs because capital gains and dividend income and interest income all have their own annual allowances so you can probably manage that without paying much or any tax - but as you have plenty more money to come from the pension over time, it is perhaps quite useful to buy yourself that flexibility for a couple of years of mortgage interest now.

There would be other solutions to it though. For example you could take that £40k+ which you later extract from your pension and can't fit into your ISAs (because of not grabbing the next couple of years' allowance) and spread it around a few venture capital trusts instead - higher risk, but tax free income and growth plus upfront tax relief. But that sort of stuff is a red herring: because if you had done the ISA now you would still have the flexibility of later taking the money out of ISA and doing VCT, or leaving it in the ISA - whereas if you didn't grab the ISA allowance now you would not have the choice and you have one fewer option available.

So - imho - if you have a sensible and justifiable reason to borrow the money, and you have a clear and low-risk way to pay it back in a known timescale (TFLS on the horizon), then it's fine to do it.

Some people will tell you, hey don't borrow to invest, there's no guarantee the gains from your investment will beat the mortgage so don't do it, don't do it, it's a risk and it might cost you money. Well, not everything you do in life is to save money and avoid costs or debt. It can be to buy flexibility. In this case, as Masonic says, you're just buying some cashflow early to take an advantage of an opportunity.

For example, if your mortgage wasn't an offset mortgage you would have the choice of entirely paying it off and having no cash in the bank, or only paying some of it off and having a bit of cash left in the bank. Some would tell you to definitely clear the mortgage because you save the maximum amount of interest. But it is incredibly useful to have cash in the bank for emergencies and opportunities rather than be saving a bit of mortgage interest but having no flexibility or emergency fund.

Bottom line is: cost it; make sure you've worked out the plan to pay it back; look at the pros and cons of opportunities and future tax savings etc if you grab your allowance vs how you would use your pension if you didn't do this. You may well conclude that it's worth doing and I wouldn't want to be the one to tell you not to, because the plan has merit.

I stumbled across this thread, and wanted to give a quick shout out to Bowlhead.

What a typically informative, non-judgmental and thorough reply! Thanks for putting the time in.:T:T:T
:beer:

masonic

Lokolo wrote: »

A question on this as I am in slightly the same position. With no debts, a largish credit card limit with offers and only really cashflow issue.

How did you transfer it to the ISA? As in, with my CC I get 0% offers in cash and purchases. When you deposit into the ISA was this done as a money transfer (my offers are usually 0% money transfer but with a 3% fee), or a purchase?

I planned ahead. I took the card out last year and used it to cover my living costs while I diverted my income to fund replacement subscriptions into an ISA I had previously made a flexible withdrawal from to invest in P2P, and then used up what I have left of this years allowance in a new IF ISA.

ffacoffipawb

kidmugsy wrote: »

Couldn't you start by swapping to a much cheaper mortgage, releasing £40k on the way?

Its just for 2 years 3 months so not worth remortgaging for that.

ffacoffipawb

Right just to close the thread ...

£10,000 invested in Standard Life Equity Income Trust (SLET)
£10,000 invested in Value and Income Trust (VIN)

VIN is on a 20% discount to NAV and SLET about 10%.

Dividend will exceed the mortgage interest rate of 3.5% (just).

Will repeat in April 2018 and April 2019 and repay the £60,000 (or whatever) in July 2019.