A little Advice Please

ydraigcoch

Hi,

Could someone please offer a little advice?

I have a five year plan where by I intend to save enough money in order to pay off my mortgage. To do this I plan to save around £1000 per month for the next 5 years. As I am a High rate Tax Payer (40%) I want to be able to benefit from as much tax free savings as possible. However I do not want to take risks with the money as I need to garantee my mortgage payment.

I have looked at alot of different accounts available, like cash ISAs etc but am unsure what is best and what I can invest.

I have £7000 to start the ball rolling and am looking to start straight away.

Any advice you can give me is much appreciated.

Thank You

Dave

debbie42

Can you not overpay your mortgage at all? I'd have thought that more tax efficient than saving the cash elsewhere (apart from ISAs, of which you only currently have £3K cash allowance p.a.).

jem16

With a timescale of 5 years you could consider using your £7k pa S&S ISA allowance although you would need to take some risk. Or you could use both the S&S allowance and cash allowance.

If you want to avoid all risk and as a higher rate taxpayer you could also consider NS&I Index-linked certificates. You can put £15k into each issue.

jimatko

Debbie is correct. For a 40% taxpayer it is best to overpay the mortgage.

Either move to an offset mortgage or check to see how much you can overpay on your current mortgage (many have limits on this).

Aegis

For 2 years you could put the excess into NS&I's Index Linked Savings certificates, as these will pay tax-free interest above the RPI (I believe), which turns out to be very beneficial for higher rate taxpayers. In addition to that, your cash ISA allowance should probably be used every year between now and then (£3k this year, £3600 each year as of next year). If you have a spouse you can transfer some of the money to her if she is a lower rate taxpayer, and you can also use her ISA allowance(s) between now than then.

I would be hesitant to suggest using the stocks and shares portion of your ISA. 5 years is usually considered the minimum period for which you should be investing your capital, and as soon as you make your first payment, the period you'll be in for will be less than 5 years and reducing constantly. You might be ok with low risk investments and this approach, but that's entirely up to you!

Jonbvn

To summarise:

1. Cash ISA's.
2. Index Linked Savings Certs, although not ideal for saving monthly.
3. Transfer savings to your OH (assuming she pays tax at a lower rate).

jimatko

All talk of usings savings to achieve your goal is incorrect.

Go onto if.com or one of the other offset mortgage companies and see the effect of £1000 overpayment per month. It will astound you.

Aegis

jimatko wrote: »

All talk of usings savings to achieve your goal is incorrect.

Well there's a fair and balanced statement...

What if his current interest rate is fixed at 4% because he got lucky when the interest rates were low, meaning that he could now get 2.2% more with cash ISA savings and a little less on the NS&I savings certificates? That would make tax-free saving/investing the way to go in this case.

Maybe his mortgage doesn't allow overpayments without hefty penalties? that would explain why he actually asked for a savings plan strategy rather than asking if he should overpay now.

Yes, it's something to consider, but it's not going to be THE correct answer.

Jonbvn

I am guessing the OP has a 5-year fix. With a likely ERC of 2%+ it would be madness to pay off the mortgage, until the fixed rate ends.

ydraigcoch

Thanks for all the Advice. Certainly gives me a few things to think about!

As for my Mortgage. I am currently on an introductory tracker rate which is @ 6.5%. This rate is due to expire (end of Dec), so I am currently thinking of changing it to an interest only mortgage for 5 years, so I can free up more cash in which to invest.

I understand that paying larger sums into the mortgage is the best (sensible) way to do it and hence reduce the overall cost (interest). However due to circumstances (1st new Baby on the way) I would rather have the security of having my money invested, should I need it in an emergency.

I could use the Wifes Accounts who is a low tax payer (will soon not be working) but she already has £3000 in a Cash ISA for this year.

I am interested in the Index Linked saving certs. But to be honest I know little about them and so I will have to read up on them. Any good sources?

Once again Thankyou for your advice so far it is much appreciated.

Aegis

Ok, if you're paying 6.5% interest on your mortgage, you should almost certainly get onto a flexible mortgage and overpay the amounts you're talking about each month. In order to match that rate, a higher-rate taxpayer would have to be either earning more than 10.8% interest before tax (i.e. more than 6.5% tax free) or increasing capital value of an investment by more than 7.93%.

In terms of savings, you can pretty much scrap the idea of beating your mortgage repayments without first getting on to a lower rate and second finding a tax-free savings account at a higher rate than your mortgage.

For investments, 7.9% per year is fairly easily possible (barring major crashes!), but your capital will be at risk if you go down that route, which might make you less than comfortable with the strategy.