To break a bond or not to break a bond?

TheLondoner

So I fixed a fair bit of dosh in a fixed rate bond in april (new financial year) for a year at 4.15%. As the rates are a lot higher now I feel the money is just wasting away. If I pull it out early I lose 3 months interest. I'm torn between breaking the bond and dumping the money in Legal and General shares, which are currently paying a healthy dividend and the SP looks cheap.

What do you guys think? Wait till april, or take the money out now and invest now whilst things are cheap?

PS: the money is inside an ISA wrapper too so i'd do an ISA transfer to a stocks and shares ISA. 

Bazzalona13295

Can you break a bond? 

Thought that was the deal. Fix for a year, can't then touch for a year.

TheLondoner

Bazzalona13295 said:

Can you break a bond? 

Thought that was the deal. Fix for a year, can't then touch for a year.

depends on the small print. Santander allow it but you have to pay a 90 day interest penalty. With Virgin Money it's 60 days. Some banks don't allow it at all though. 

eskbanker

TheLondoner said:

Bazzalona13295 said:

Can you break a bond? 

Thought that was the deal. Fix for a year, can't then touch for a year.

depends on the small print. Santander allow it but you have to pay a 90 day interest penalty. With Virgin Money it's 60 days. Some banks don't allow it at all though. 

The ISA status makes a huge difference (which you may have added to your post after the above question) - by law you must be given the option to withdraw from an ISA (albeit with a penalty usually), but the same doesn't apply to non-ISA fixed term products, where providers can, and generally do, have clauses preventing premature access except in extreme circumstances....

Aretnap

Moving money from a fixed rate savings account into shares in a single company is going from one end of the risk spectrum to the other, to put it mildly. When considering whether it's a sensible move the interest penalty would be the least of my worries - it will be a rounding error in comparison with the potential gains/losses on the shares.

boingy

Given that your one year fix has four months left and that you'd be paying a three month interest penalty it's probably more sensible to leave it where it is until April.

cwep2

The best way to think about it is what are likely returns:
Assuming bond matures 1st April:
Keep it in there, you get 4 months interest at 4.15% = approx 1.38% return.
To pull it out you lose 3 months interest so you are down 1.04% (vs accrued interest up to today) so the breakeven is 2.42% in the share by 1st April.

If you make 2.42% in the next 4 months on the alternative (-fees) then you are better off, if you don't you are worse off. The 2.42% in 4 months is an annualised rate of 7.26%.

Bear in mind you will lose ~2 weeks whilst they close the bond, put cash in holding account, transfer it to a new ISA etc. If it took a month to do this (worst case scenario) you'd need to make 2.42% in 3 months which is 9.68% annualised.

BUT you will pay 0.5% stamp duty buying shares as well, so the share now needs to go up 2.92% to break even (that's assuming zero trading fees as well). This pushes our annualised rates required to 8.76% and 11.68% depending on whether you have 3 or 4 months to do it, with the likely timing somewhere in between.

But of course shares move much more - LGEN was 203.1p in late October and went up to 232.9p less than a month later which is over a 14% move. In reality if you had cashed in your bond on 25th October hoping to buy the shares at 204p (where it was that day), 2 weeks later when the transfer has (maybe) gone through it was now at 220p some 8% higher. The timing of when you buy and sell will make much more of a difference than the annual return. 

If you want to buy the shares, the timing will make much more difference than the interest penalty, but from a *money saving perspective* the expected value on annualised return to be at breakeven if you buy shares rather than keep it in the bond (with the assumptions above) would be somewhere between 8.76% and 11.68% which is higher than the dividend yield (8.53% according to HL.co.uk).

Caveat - if the bond matured 30th April these would be lower, using 5 months until maturity instead of 4 months the ballpark levels would be 7.85% to 9.81%. You didn't tell us exactly when it matures. 

Albermarle

TheLondoner said:

So I fixed a fair bit of dosh in a fixed rate bond in april (new financial year) for a year at 4.15%. As the rates are a lot higher now I feel the money is just wasting away. If I pull it out early I lose 3 months interest. I'm torn between breaking the bond and dumping the money in Legal and General shares, which are currently paying a healthy dividend and the SP looks cheap.

What do you guys think? Wait till april, or take the money out now and invest now whilst things are cheap?

PS: the money is inside an ISA wrapper too so i'd do an ISA transfer to a stocks and shares ISA. 

It is better to have a long term strategy, rather than switching around randomly.

Decide in advance how much you want in short term cash savings, longer term cash savings , in even longer term investments and in your pension. Then stick to it, approximately anyway.

or take the money out now and invest now whilst things are cheap?

No share price is ever cheap or expensive. It reflects the markets view of the value of the company at the present time. Also buying individual shares is especially risky.

subjecttocontract

If you think your situation is bad......mine is far worse. Halifax fixed @ 0.4% until May 24 with no escape clause......but its only £5000.......and it does qualify me for their prize draw.

Middle_of_the_Road

subjecttocontract said:

If you think your situation is bad......mine is far worse. Halifax fixed @ 0.4% until May 24 with no escape clause......but its only £5000.......and it does qualify me for their prize draw.

By May 23 the same bond paid 4.35%   I'm guessing this is a two year bond.     
Usually with Halifax anyone wanting to cash in the bond could have done so by paying a charge equal to 180 days interest.
Wondering why would one decide to fix at the rates that were available before all the increases seen in the last year,
surely you only fixed at that rate to be eligible for the (5K min)prize draw? 

subjecttocontract

It's a 2 year fixed rate bond, fixed in May 2022 when bank base rate was 0.75%.
I decided back then that with interest rates so low, any savings account that offered a prize draw made perfect sense......I was giving up around £20 a year in interest for the chance of a prize win, fortunately it's just £5K.