Offset mortgage or investment

sebtomato

Hi all,

I currently have an offset mortgage with a remaining balance of £100K, and £100K on my savings account, so basically the mortgage is fully offset, I am paying £0 interest. I am making a capital payment each month, as if the mortgage was a regular repayment one (and not interest only).

Mortgage rate is 2.50% so I am thinking I would need to find an investment with a return of at least 40% higher if I want to consider taxation and have positive gains compared to keeping the cash on my savings account.

I could also pay back the mortgage now in full, but I am thinking keeping a money reserve costing only 2.5% could be useful, if need be.

Is that a correct thinking?

Thanks

payless

Obviously not an issue when fully offset, but there are lots of mortgage deals below 2.5%

dividendhero

Depending on your circumstances. a zero balance offset mortgage might be an option..eg if you think you might need a low cost loan in future.

sebtomato

payless wrote: »

Obviously not an issue when fully offset, but there are lots of mortgage deals below 2.5%

I am on a tracker currently.

I am planning to repay the mortgage within 5 years, but I haven't found a fixed five year mortgage that can beat my current rate.

bowlhead99

sebtomato wrote: »

I am on a tracker currently.

I am planning to repay the mortgage within 5 years, but I haven't found a fixed five year mortgage that can beat my current rate.

You don't mention the LTV, but Nationwide's 5 year fix with zero product fee is 1.79% if under 60% LTV, or 2.04% if under 75%.

Presumably even if you are not under 60% at the moment, you could get there by paying down the equity with some of the £100k cash, and then put some more of the spare cash into a pension getting 40% tax relief (a return very substantially more than 1.79%)?

The tax relief assumes you are on higher rate tax given you mentioned needing to find a return 40% higher than 2.5% ; but your own maths on that seems muddled because a high rate taxpayer would need to get 4% return to be able to pay 40% tax and be left with 2.5% net, and 4% is 60% higher than 2.5%, not 40% higher...

steampowered

The best option is likely to be to increase your pension contributions.

As you are a higher rate tax payer, the tax relief gives you an instant 40% return on your investment. Plus you get investment returns on your pension investments.

The next best option is likely be to maximise your ISA allowance by opening a stocks & shares ISA and investing in a globally diversified investment fund (such as a Vanguard tracker). You won't pay any tax on the returns you get within an ISA, though you don't get an instant 40% boost from the tax man as you would with pension contributions, and you can't invest the full £100k straight away.

For reference, the average long term return on stocks and shares is about 7-8% per year.

I would maximise pension contributions and use your ISA allowance before paying off a mortgage.

sebtomato wrote: »

I am planning to repay the mortgage within 5 years, but I haven't found a fixed five year mortgage that can beat my current rate.

Halifax are offering 1.44% on a 5-year fix at 60% LTV. You might be paying a higher interest rate because you have an offset.

Zero_Sum

steampowered wrote: »

The best option is likely to be to increase your pension contributions.

As you are a higher rate tax payer, the tax relief gives you an instant 40% return on your investment. Plus you get investment returns on your pension investments.

The next best option is likely be to maximise your ISA allowance by opening a stocks & shares ISA and investing in a globally diversified investment fund (such as a Vanguard tracker). You won't pay any tax on the returns you get within an ISA, though you don't get an instant 40% boost from the tax man as you would with pension contributions, and you can't invest the full £100k straight away.

For reference, the average long term return on stocks and shares is about 7-8% per year.

I would maximise pension contributions and use your ISA allowance before paying off a mortgage.


Halifax are offering 1.44% on a 5-year fix at 60% LTV. You might be paying a higher interest rate because you have an offset.

Therell be a fee on the halifax deal wont there? Cant imagine it to be that low fee free.

sebtomato

Thanks all.

I have already used my full ISA allowance for the current tax year, and already contributing a lot to pension (via salary sacrifice, to optimise on tax).

I think I could indeed find a 5 year repayment mortgage with a lower rate than what I am paying. For instance, First Direct have one at 1.64% with no fees (my LTV is low).

Sounds like investing the £100K I have and borrowing £100K instead at only 1.64% to pay the mortgage would be the best financial option instead of leaving the money offset, particularly considering the capital growth on the £100K invested, and not just the interest/dividends earned to balance out the interest paid on the mortgage.

Basically, if after tax, I get more than 1.64% per year on the £100K invested, I am better off. It may be difficult to beat on the stock market/bonds, if we consider just returns and tax on dividends. However, with capital gains, it should be doable.