Investing some borrowings…

karie

It’s a bit of a long and unfortunate story but I have basically borrowed £130k equity from my home for a project that is no longer happening. The borrowings are at 2.24% for 5 years, interest only, around £220pm.

I can overpay by 10% to reduce it didn’t but clearly doesn’t impact it much.

I could pay down our main mortgage but that rate is 1.79%. 

I could hope interest rate rises mean savings rates hit a similar level in order to neutralise the interest costs.

any other ideas / what would you do? 

george4064

First of all, since you require the money in 5 years I would suggest NOT ‘investing’ the money as you could end up with a loss when you need to realise the funds to pay-off in 5 years time.

There is a wider question what you plan to do with the money after (the initial?) 5 year period, do you plan to fix it onto a new deal or pay it back? That will potentially extend your horizon and hence impact what you can reasonably do with the cash.

If you plan to repay the £130k in 5 years then stick it in a suitable fixed account or notice account (or mixture of), up to you: https://moneyfacts.co.uk/savings-accounts/. If you plan to keep the debt and re-fix it after 5years, you have more options available to you by potentially investing all/some of that cash.

Daliah

Split it into at least 2, at different financial institution, in order to have the full amount covered by FSCS.

Even with current interest rates, which are likely to rise further in the near term, you can make a bit of money from fixed term savings. If you have a reliable partner who pays lower tax than you do, you might want to put some or all of the money into their name - - though as soon as you do that, the money is legally theirs.

Albermarle

If , as George4064 , suggests, you may not pay all the £130K back after the 5 years, you could consider investing it for the long term,  and one way to do this is to use it to top up, or start a new pension. In doing this you can gain tax relief, depending on your circumstances/earnings.

karie

Thank you @Albermarle @Daliah @george4064 for taking the time to respond

you raise a good question as to what we will do at the end of the 5 years. I had defaulted to just repaying it, to remove the debt and monthly interest cost. But that’s not a necessity, just a default preference to have less debt. 

I will think about whether boosting our pensions would be a good option here, though my options are limited, my husband doesn’t pay very much into his. 

Daliah

I am not so sure that putting this money into pensions would be a good idea as you won't be able to access it before age 55 (and soon 57). What if you want/have to repay the loan before then, or if the investments have tanked at the time you need to pay back the loan? To me, it also appears to be risky to assume you would get an acceptable renewal deal at the end of the 5 years. 

25_Years_On

karie said:

I could hope interest rate rises mean savings rates hit a similar level in order to neutralise the interest costs.

any other ideas / what would you do? 

They already are. A three or four year fixed rate bond paying about 3.2%, perhaps two to stay in the FSCS limit, would net about £4000 per year. Not a five year bond as the money would needed before the bond matures. Any tax liability will need to be considered in whether this really covers the cost of your interest payments. Best thing is to wait for the next interest rate meeting, which I think is next week, after which better rates might be available

karie

@daliah the debt itself isn’t an issue to hold longer-term, I just default to having as little debt as possible but I guess I’m used to low savings rates until now!

@25_Years_On you’re totally right, I hadn’t quite realised that until started looking at this properly. The tax element is a shame but maybe isa rates will also increase with time. In the meantime it could all go in my husbands name who is a lower rate tax payer. Maybe not the huge issue I originally thought this was.

Altior

Was the additional loan secured on the basis of the project increasing the value of the property?

Investing it may break the terms of the agreement. You also ordinarily have to declare the source of the funds.

Daliah

karie said:

@daliah the debt itself isn’t an issue to hold longer-term, I just default to having as little debt as possible but I guess I’m used to low savings rates until now!

May be I haven't expressed properly what I meant, so I will try again. 

A pension involves investments (as opposed to savings), and you cannot start drawing from a pension until you are 55 (soon 57). May be the latter isn't an issue - I don't think you have told us how old you are.

But even if age is not an issue, your investments may have tanked by the time you need, or want, to repay some or all of your loan. Where would you find the money to repay your loan? What if your £200k are worth £120k in 5 years' time, and the renewal of the loan would be at 7%+?

It's obviously your risk to take but if it was me, I would never invest borrowed money. I would only ever save it, so the capital is preserved and can be repaid if desired. Therefore this borrowed money would, IMO, not be suitable for a pension.

karie said:

 The tax element is a shame but maybe isa rates will also increase with time. In the meantime it could all go in my husbands name who is a lower rate tax payer. Maybe not the huge issue I originally thought this was.

As to [cash] ISAs: it would take you 5 years to get £200k into ISAs in your and your husband's name, 10 years if in one name only. Whilst all currently available ISA rates are slightly better than non-ISA rates for higher rate tax payers, and definitely worth having, be careful for BR tax payers as for them, some of the ISA rates are actually worse than non-ISA rates. As BR tax payers get up to £1,000 tax free interest a year, I don't think there is much mileage in ISAs for them.

karie

Thank you @Daliah really comprehensive and good advice, I appreciate it.

I am late 30s.
I take your point re: the risk here. I am still on the fence. We have a lot of equity in our house hence slightly more relaxed about not repaying this, if it all went wrong we do have assets.

@Altior no, no conditions attached like that. Good shout though. 

I will keep thinking, watching rates and researching. For now I’m going to split it across two investec 2.1% 90 day notice accounts so it’s somewhat covered - and remains accessible.