Using mortgage for savings... bit complicated!

ringding

You'll have to bear with me as I try to explain this clearly.

We were previously mortgage free but needed to borrow money to build an extension on our home.
To cover the building work I arranged a mortgage with TSB for 190k. It's a 5yr term fixed at 1.49% (I agreed it with them in December and it started in March).

Unfortunately my Dad died in March, and Mum has very kindly gifted us part of his estate so that we can pay off the mortgage (we're aware of inheritance tax implications should she pass away in the next 7yrs, that would be covered out of her estate).

I was getting ready to find out the early repayment fee, but today the penny dropped that even 1yr fixed savings deals are offering interest rates in excess of what we're paying on the mortgage. 

Am I being dim in considering putting the 190k of the mortgage into a series of fixed rate savings accounts until we're out of the 5yr term of the agreement and then paying it off in full? It feels like we could use the freak of timing on interest rates to our advantage to 'earn' a few k in interest.

masonic

It's known as stoozing, and it used to be quite popular when rates were previously higher and there were several avenues where you could borrow at a lower rate than you could earn in a savings account. Obviously you need to carefully check all of the details of your plan, as making a mistake could be costly, but it is a sensible option to exploit this situation if you can.

ZeroSum

If savings rates pay more interest than you're charged on debt, you'll make money

It's a similar principle to stoozing credit card 0% debt

ringding

Thanks both. I feel a bit of spreadsheeting coming on this weekend.

thegentleway

Don’t forget you’ll likely pay income tax on the interest

ringding

thegentleway said:

Don’t forget you’ll likely pay income tax on the interest

Thanks, that had occurred to me.
I also think I need to be careful to spread the saving across different banks so we're protected should any fail. I know there's the £85k protection.

Albermarle

Unfortunately my Dad died in March, and Mum has very kindly gifted us part of his estate so that we can pay off the mortgage (we're aware of inheritance tax implications should she pass away in the next 7yrs, that would be covered out of her estate).

In certain circumstances, the recipient of the gift can be liable to pay IHT on it . Although the amount tapers down over 7 years.

diystarter7

I'm sure you did not but don't forget the tax on savings at your tax rate that is applicable to you.

Evne if its evens, cash is king and IMO reduces stress/fear of losing job etc as something to fall back on to until you get the job you want and not having to borrow at sky-high interest rates.

tightauldgit

ringding said:

You'll have to bear with me as I try to explain this clearly.

We were previously mortgage free but needed to borrow money to build an extension on our home.
To cover the building work I arranged a mortgage with TSB for 190k. It's a 5yr term fixed at 1.49% (I agreed it with them in December and it started in March).

Unfortunately my Dad died in March, and Mum has very kindly gifted us part of his estate so that we can pay off the mortgage (we're aware of inheritance tax implications should she pass away in the next 7yrs, that would be covered out of her estate).

I was getting ready to find out the early repayment fee, but today the penny dropped that even 1yr fixed savings deals are offering interest rates in excess of what we're paying on the mortgage. 

Am I being dim in considering putting the 190k of the mortgage into a series of fixed rate savings accounts until we're out of the 5yr term of the agreement and then paying it off in full? It feels like we could use the freak of timing on interest rates to our advantage to 'earn' a few k in interest.

Absolutely makes sense to save the money in an account that pays higher interest than your mortgage rate provided you've done the sums right. The only other thing to consider is whether you will have the discipline not to spend the money or whether it might end up being nibbled at here and there, but if you are confident then you won't then absolutely it makes sense. 

IamWood

What the OP has decided to do? I'm interested to find out more @ringding

ringding

We've decided to go for it. The mortgage total has been split between fixed savings accounts with three different banks. Have staggered the fixed periods with 6  (1.9%), 9 (2.3%) and 12mth (2.58%) durations in the expectation that interest rates will rise and wanting the opportunity to take advantage of any new deals that might arise. Will probably then go for 1yr fixed on each as they come to an end. 

Even factoring in the tax that will need to be paid on the interest it's worth it. But will keep a close eye on what happens with interest rates. I figure that the worst that can happen is that we end up making a little in the savings that can offset some of the early repayment fee if interest rates don't stay at least at the level they're at now.