Dividend Investment

RustyH

Good Morning All,


I am due to be paid a dividend of circa £20k after tax and was wondering if I could get some advice on where best to place it. We have our thrid child on the way and currently only live in a 3 bedroom house, so the plan is to move relatively soon (withing the next 2 years).

I currently owe around £55k on my mortgage which is 25% of my current house value.



I was wondering if putting in straight on to reducing the currently mortgage would be the best routes, so when it comes to getting a new mortgage there will be a greater value captial asset to put as the deposit.
Alternative, put it in an savings account to use a physical cash deposit when the time comes to buying a house.

Or maybe premium bonds?


Any advice would be greatly appreciaited


Many thanks

bowlhead99

RustyH wrote: »

I currently owe around £55k on my mortgage which is 25% of my current house value.

I was wondering if putting in straight on to reducing the currently mortgage would be the best routes, so when it comes to getting a new mortgage there will be a greater value captial asset to put as the deposit.
Alternative, put it in an savings account to use a physical cash deposit when the time comes to buying a house.

On the day you complete the new purchase you will be paying for the property with a mixture of sales proceeds from your last house, net new mortgage borrowings and cash from your bank account. So in that sense it doesn't matter much whether you get more net sales proceeds (due to having less old mortgage to pay) or have more cash in your bank account.

But when you exchange contracts on the new property you will need to provide a cash deposit which is typically 10% of the purchase price unless you haggle it lower. If you don't already have a big pot of cash savings to fund this, it would be more flexible / convenient to keep the £20k in savings rather than have no cash and £20k more equity in your home, because you won't be able to access the equity in your existing home until you actually complete the sale.

Your existing mortgage rate is probably higher than the money you would earn in a bank account (e.g. Marcus at 1.5%) or in premium bonds (less than 1.5%, with the interest entered into a prize draw in which you are extremely unlikely to actually win all the full range of prizes to get the 'average' headline rate).

However, while it might be financially better to be saving (e.g.) 2% mortgage interest instead of earning (e.g.) 1.5% interest income, half a percent difference for an entire year on £20,000 is only £100 and it costs you the flexibility of having £20k instant-access cash on hand for house deposits, emergencies, etc. So I would probably not pay off my old mortgage down to below 25% loan-to-value, given interest rates are very low at the moment so the mortgage will not be costing much, and I value flexibility. Knowing next to nothing about your personal circumstances or your family's income / wealth generally, it's difficult to comment further.

george4064

Where are you getting this £20k 'dividend' from?


Is it from a share holding in a publicly listed investment or some sort of private investment ownership you have?

Heedtheadvice

4064 is not answering the question but raises a very valid point!
You write that you get divi as a taxed income and if possible you should be transferring as much as you can every year to a S&S ISA to reduce and hopefully eventually eliminate tax altogether.
It might be prudent if (you do not give any clues) your divi comes from an or a few individual shares to also transfer to collective investments.


Generally I agree with B/head's post. If you were thinking long term and no prospect to move property and you had sufficient emergency fund and prospective pension income then reinvesting your income in more S&S might be a better financial route rather than paying off the mortgage, as long as interest rates remain so low.


However cash, although at virtually derisory interest rates, really leaves your options open in the short term.

edgex

As above, keep it as cash somewhere. Even a 6month or 1year fixed account/bond will give you something on top.

No other debts?
Other savings?

RustyH

Many thanks for all the replies and advice

I will try and answer some of your question.

With an expanding family, and only a small 3 bed house, we are going to need to move house relatively soon. So that is the short term plan and so will need to save for that.

The dividend is from shares I own in a limited company that I am also director of, and will be taxable.

I have little debt above the mortgage and a credit card balance (pretty small). I also have no savings at present, that is definitely the next plan after sorting a house for the family

How that helps give a better picture

Thanks