Would you take this mortgage offer and invest the fund (250K 5 year-fixed rate 1.54%)

IamWood

Dear all,

I recently remortgaged (250K, 5 year fixed term with an interest rate of 1.54%) my current house (which I own outright) in the hope of buying another flat near London. The purchase is on hold but my mortgage is still on offer: 

With inflation so high and the interest rate catching up. Do you take the funds and invest them (or just put them in a higher-rate savings account).

Please share your thoughts.

Thanks

Albermarle

Investing  short term is very risky . You could end up with a mortgage of £250K and an investment of only £200K.
If you forgot about the house purchase and invested it long term, then there could be an argument for that.

Savings account would be more sensible but you would have to split it over several providers, You can get between 2 and 2.5% for a one year fixed rate . So in theory you could make a couple of grand profit, even if you had to pay some tax. Although there might be some mortgage arrangement fees?

I presume you told the mortgage company you wanted the money to buy another property? If so you will have to be careful about deploying the money in a different way.

IamWood

Thank you @Albermarle

The arrangement fees are £899 if my memory serves me right.

My current thinking is this:

The advantage of taking the mortgage:

1. The door is still open for me to look for another property if I want to for 5 years, with such a low rate.

2. Putting the fund in a savings account seems to be able to earn free money (quite a few thousand in 5 years?) by arbitraging the interest difference.

3. I checked with the mortgage adviser who said I could save the fund and make the purchase later, which is still my plan although it's not definite.

4. Potentially I can pay for my son's university fees without a student loan (sensible or not, that's another debate).

The downside of taking out a mortgage:

1. Life is too short and too complicated

2. Investing is risky but can be limited with savings accounts, which is my intention now.

3. No longer debt free.

Do I sound reasonable?

george4064

My thoughts is that you should not buy the London flat and invest the money recently released from your existing property, in a diversified portfolio at a suitable level of risk according to your risk tolerance.

NedS

If you do not buy the flat (presumably to rent), can you afford to pay the mortgage out of your current income?

What rate can you get on a 5 year fixed-term investment? Can you beat the 1.54% plus fees without taking any investment risk?

Iain_For

You’d end up paying quite a bit of tax on 250k in savings accounts over five years, even if you managed to put some into cash ISAs over time. At 2.7% annual interest roughly 6k in tax if you’re a basic rate tax payer, up to ca. 13k in tax if you’re a higher rate payer as long as the savings accounts paid interest annually.

IamWood

NedS said:

If you do not buy the flat (presumably to rent), can you afford to pay the mortgage out of your current income?

What rate can you get on a 5 year fixed-term investment? Can you beat the 1.54% plus fees without taking any investment risk?

1) I should be able to if I'm still in employment.

2) What about saving accounts?, say: https://www.dfcapital.co.uk/savings/fixed-rate-deposit/

Thanks

Albermarle

Best 5 Year Fixed Rate Bonds up to 2.85% Fixed | moneyfacts.co.uk

redpete

Another disadvantage:

- Your circumstances might change and you might want / need to sell the current property, so even fixed term savings could give you a problem.

IamWood

redpete said:

Another disadvantage:

- Your circumstances might change and you might want / need to sell the current property, so even fixed term savings could give you a problem.

Thanks

It's possible as my family did talk about to sell my current house and purchase a bigger property near London instead, when my second boy goes to university in 2 years. However I should be able to take the mortgage with me and it works for my advantage in this case I guess.

pjread

Bear in mind if you're a higher rate taxpayer, that ~2.8% gross is ~1.68% after tax - so sure, it's around £300-400 'free' a year on £250k but in exchange you have the (presumably low) risk of income dropping while this cash is locked away, and needing to pay penalties to release it.

Personally if ignoring the BTL idea, I'd consider chucking it in the markets for the next 5 years - but I have a high risk tolerance and still wouldn't if I had it earmarked for something else.  And given current state of the markets, I would actively try not to pay attention to it more than once a year