What to invest £170,000 in?

Hi Folks,

I don't want to sound too vulger but I find myself in the above fortunate position due to an inheritance.

The money has given me the financial independance to leave my full time job which I had grown tired of, and am now able to fund the next year at college with a view to a three year uni course after that.

I have a pool of about £15-£20 k in Santanders 1,2,3 account for instant access as this seemed the best one around at the moment. I have maxed out my s&s & cash ISA entitlement this year. This left about £130,000 for which I have split into two 3% gross yielding instant access accounts, almost as "holding accounts".

My fear is leaving them in there when they could be working just that little bit harder somewhere else for a risk factor that is only negligably higher.

Has anyone got any suggestions in this respect?

My risk attitude is cautious. I do not know enough about the markets to take any more risks that this at the moment.

I will do the math regards to a student loan when I hopefully gain my diploma from college around this time next year so that's not a factor at the moment.

I have £70,000 left on my mortgage. It is on an SVR at 4.74% as the two year fixed rate expired last month.

Pensions are not an issue.

Regards

Graham

Replies

  • jamesdjamesd Forumite
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    Well, paying 4.71% on a mortgage is something you can look at. No reason to continue doing that when you can easily get to 75% loan to value and find a better interest rate. Don't pay it all off, though, you can make more money investing in other ways.

    You might consider an offset mortgage. That way you can stick money into an offset account and save mortgage interest, tax free, a bit like a cash ISA. But since it's in an offset account, not an overpayment, you can withdraw it whenever you like, as a right.

    Longer term you really do need to be learning about investments but it's OK to do that gradually if you're really nervous, using the full ISA allowance for investing within an S&S ISA.

    For normal investments a key thing to learn about is volatility, the way the values go up and down. If you're forced to withdraw during a down time those are bad, if you're not, they are just one of the irritations that you accept for better long term performance. The volatility depends on the specific investments used.

    The big catch with savings accounts is inflation. After tax it's not that easy to stay much ahead of inflation. Investments can do that much more easily and you can expect to routinely beat inflation.

    While I couldn't guarantee capital value preservation and certainly not that it won't go up and down, it's not that hard to build a mixture of investments that could generate perhaps 6% income with some decent prospect of capital growth keeping up with inflation, though if you want to do it long term - decades - 4-5% would be more prudent.

    A catch with not investing is that if you use capital to live on, you're guaranteeing capital loss, not just risk of capital loss.

    Don't be tempted to skip student loans. The repayment terms for those are so generous that it's worth taking them even if you don't have an absolute need for them.
  • jamesd wrote: »
    Well, paying 4.71% on a mortgage is something you can look at. No reason to continue doing that when you can easily get to 75% loan to value and find a better interest rate. Don't pay it all off, though, you can make more money investing in other ways.

    I do this and don't disagree with jamesd on the theory but, in this instance, there are a couple of potential issues:

    1. The OP has stated they have already given up work so will find it hard to get a new mortgage. Even their existing lender is likely to ask what income they have and will expect it to match their affordability requirements. There are some lenders who will just switch the rate to a new deal but you will obviously be restricted to what they offer.

    2. The OP is a cautious, inexperienced investor. Even assuming HSBC's 2.99% variable deal (which is the lowest cost mainstream deal over 48 months for £70,000) the OP would pay £8356.13 in fees and interest over 4 years.

    This means the OP would need a savings vehicle which would pay at least that amount net of fees and tax just to match it, let alone earn an amount which would compensate them for any risk they take. If it does not, the OP would be better to pay the mortgage off

    This equates to £2089.03 pa net of fees and taxes. This is 2.89% for non tax payers or 3.73% for basic rate tax payers. This is also the 'risk free return' which could be achieved by paying the mortgage off.

    Taking this into account, would I risk getting less than this or losing some of my capital and be happy getting the same?

    Probably not. I would probably want to get that return plus another 1 or 2% as a 'reward' for taking the risk and to compensate me for having to take the time each month/year/whatever to review the situation, research and make any adjustments - whether I am paying someone to do it or just looking in terms of my own, 'free' time.

    The OP may be happy with 0.1%, they may want 10% - they will have to decide as part of their calculations.

    Using my figures means, as a student and likely non tax payer, the OP could need to get a return of between 3.89% and 5.73% (if their circumstances mean they are a basic rate tax payer) just to make the risk of not paying off their mortgage worthwhile.

    There are fixed rate accounts at 4-5% gross so these would be potentially suitable and support jamesd's suggestion - as long as the OP is happy to accept the lack of access that normally comes with these accounts.

    If they wanted more access they would need to look at variable accounts where the rates would be more around the 3 - 3.5% gross mark.

    How dependent you are on the income the money would generate is also a factor, one which can actually strengthen the argument for not repaying the mortgage.
    jamesd wrote: »
    You might consider an offset mortgage. That way you can stick money into an offset account and save mortgage interest, tax free, a bit like a cash ISA. But since it's in an offset account, not an overpayment, you can withdraw it whenever you like, as a right.

    Another good option, mainly from the point of having the capital available at some point in the future - the OP will need to decide whether they have plans which would make this likely (bearing in mind they should always be able to borrow against the value of the property anyway and an offset just makes the process potentially quicker).

    You also need to bear in mind that most offset lenders reserve the right to restrict your facility to a % of the property's value - something which is a drawback in a falling market as discovered by a number of Woolwich borrowers found a couple of years ago.

    You also have to remember that many lenders insist on repayment these days so your available facility would fall each year in line with a repayment mortgage. i.e if you offset £70,000 now you may only be able to draw back circa £62,000 in 5 years' time.

    If you want to pursue this option you will need to make sure you know and understand the T&Cs of the offset account you choose.

    Using ISA allowances where possible is also a basic tenet of financial planning (albeit less so if the OP will be a non taxpayer for the foreseeable).

    By not investing at all the OP would potentially lose out on this valuable tax relief (and maybe some growth) so should consider using their stocks & shares ISA allowance each year to start off slowly. A first time cautious investor would potentially use something straightforward and low cost like Vanguard lifestrategy Income or Conservative Growth etc (although this is for illustrative purposes and not a suggestion for the OP).

    This obviously has a knock on effect on their ability to tie money up in fixed rate accounts so they are likely to need a combination of Instant Access Cash ISA, Variable rate notice, fixed rate deposit and Stocks & Share ISA to get a 'desirable' balance of risk, reward and tax efficiency (and that's without venturing into the murky, disputed depths of the use of Pension contributions while you're still young).

    Apologies for the length of post but I hope this helps
    I am an IFA (and boss o' t'swings idst)
    You should note that this site doesn't check my status as an IFA, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • edited 18 September 2012 at 8:37AM
    jamesdjamesd Forumite
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    edited 18 September 2012 at 8:37AM
    I agree that getting a new mortgage may be tough or impossible if the job is already left. Sad lack of advance planning if so because it'll probably scupper the easiest way to safely save a significant amount of money. Though maybe some lenders would consider the repayment strategy available here since it's not permanent loss of job or of income. Far easier if the job is still around.

    It's not hard to find investments paying more than the mortgage. Harder in savings accounts. 8% or so can be obtained from some, 6% from many more. Tax free if inside a S&S ISA. Wouldn't want to put all of the money into just one investment, however much it pays, though.

    The offset restrictions depend on the lender. First Direct for example has a mortgage account with agreed facility, an offset savings account and an offset current account and can't just withdraw the facility on the savings and current accounts to lock up the money, unlike the setups where the offset is done as overpayments on the mortgage. Their offset deals are also interest only. As you wrote, knowing what you're buying matters and you'd ideally choose a suitable product, not that unsuitable Woolwich one.

    (Text removed by MSE Forum Team)
  • TottonTotton Forumite
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    Paying off the mortgage would imho be a sensible decision. Sure you can call it a cheap loan but it is still a debt to be paid off plus you need to make at least that interest rate on your investments just to stand still.

    Best of luck for the future,
    Mickey
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