What to do with £42000?

Mbick

I have just sold a property that we used to live in and then rented. We will soon have £42000 and wonder what are the best options.
We have another house with around £185,000 left on the mortgage. Rate-1.99%
A loan for house improvements with 4 years left, around £17000 left on it at 2.8%.

Is it best to pay these off or put it into savings?
If so which ones?
My wife is a basic rate tax payer and I’m a higher rate.

Forgive me if I’ve posted this in the wrong place- I’m a newbie.

bowlhead99

Mbick wrote: »

I have just sold a property that we used to live in and then rented. We will soon have £42000 and wonder what are the best options.
We have another house with around £185,000 left on the mortgage. Rate-1.99%
A loan for house improvements with 4 years left, around £17000 left on it at 2.8%.

Ok, is this 'other house' one that you live in or rent out?

It makes a difference because if it's a property rental business the existing loan interest cost will be reducing your business profits and therefore your tax bills, and you would lose that tax saving if you paid off the loans and reduced your interest cost. Whereas if you are living in the property, and pay off the £17000 loan, you will save a high rate of interest expense with no adverse consequences to your tax position. You'd literally be 'earning' 2.8% net of tax by no longer having that loan, which is higher than banks pay for savings deposits.

Is it best to pay these off or put it into savings?

We don't know anything about your personal circumstances. How can we possibly know whether it is more useful to you to have a large savings pot for future emergencies, property improvements, holidays, car purchases, a child's education, retirement etc ; or to have a lower level of loans and mortgages and then potentially need to borrow or remortgage if you have some expensive emergency or want to take up some interesting opportunity ?

If so which ones?
My wife is a basic rate tax payer and I’m a higher rate.

One of the loans (the home improvement one) will save you 2.8% a year on each pound that you pay off it (assuming no significant early repayment penalty). The other will only save you 1.99%.

In your shoes I would pay off the £17k loan early and then (as 1.99% is not an extremely high rate and I would value the flexibility of having a large pot of savings in my life) I would not pay off any of the 1.99% mortgage for now. If interest rates rise significantly in future it might be a good idea to do it then having reassessed the situation.

For the moment I would put the remaining £25k into the highest paying accounts you can find (which is likely to be a combination of high interest current accounts, regular saver accounts and normal savings accounts). We know nothing about the rest of your circumstances, but if you have other interest income from existing savings - so that you will already use up your savings interest allowances for the tax year - it would make sense to put more of the money in your wife's accounts than your own account or joint accounts, as she would pay lower tax on her savings interest income.

If you feel £25k is too much cash to have knocking around in bank or building society accounts because you already had plenty of other savings before you sold this property, you should consider either putting the money in your pension (getting 40% tax relief) or if you don't want to lock the money away until your late 50s, consider investing in a stocks and shares ISA.

Mbick

Thanks for the quick reply! I hadn’t considered the possibility of putting it into my pension- lots to think about.

The other house is the one we live in. We don’t own any other property.

Dazed_and_confused

Don't forget to keep something back for any capital gains tax you might have to pay.

AnotherJoe

Another vote to seriously consider pension. You could get £100 in your pension for £60. Thats a very hard rate to beat ! (to understate it )
The downside of course is that it is locked up, but strongly consider putting some of it in.