What to do with £70k for 2 years.
Discussion
Hi PH finance wizards,
I haven't posted in Finance before, so thanks for having me, and I hope you can help.
I've got approx £70k (after tax) as a lump sum which might be heading my way later in the year, perhaps Aug-Nov time. (It's from the sale of share of a property I inherited.)
I need to generate an income from that lump. Or rather I would like the lump to have the biggest possible monthly impact on our income/outgoings. I don't need to consider long-term/retirement right now. The day-to-day cash position is more important for various reasons.
I've never had savings in my life, so am utterly clueless on all financial products. The interest earned will supplement our earnings for a while, as we're not breaking even at the moment. There's a slim chance that if we can cut luxuries and maybe use the £70k to earn a few quid on the side, maybe my wife can stay home and raise the kids. Childcare is so expensive that there's only a few hundred quid/month difference in her going back to work or not, and it really has us thinking about the pros and cons.
My instinct would be to throw the lump at reducing the mortgage, but it's a fixed term (5yr 3.99% till 2018) and partial settlement penalties apply (although I have yet to quantify these with the BS.. I guess from the paperwork it will be about £3-4k penalty to give them £70k of capital repayment).
So, lets assume I can't do that.
I'd be happy to park it in premium bonds until remortgage time, but that won't generate any income. There are ISA allowances to use up, but as before I'm more interested in the short term monthly cash position than long term savings.
What other options are there? Is there a particular type of savings account I could look for? Can I beat the 3.99% my money would "earn" reducing the mortgage?
I know there's probably not enough info to go on, but a steer in some possible directions would be most appreciated.
Thanks,
TartanPaint
I haven't posted in Finance before, so thanks for having me, and I hope you can help.
I've got approx £70k (after tax) as a lump sum which might be heading my way later in the year, perhaps Aug-Nov time. (It's from the sale of share of a property I inherited.)
I need to generate an income from that lump. Or rather I would like the lump to have the biggest possible monthly impact on our income/outgoings. I don't need to consider long-term/retirement right now. The day-to-day cash position is more important for various reasons.
I've never had savings in my life, so am utterly clueless on all financial products. The interest earned will supplement our earnings for a while, as we're not breaking even at the moment. There's a slim chance that if we can cut luxuries and maybe use the £70k to earn a few quid on the side, maybe my wife can stay home and raise the kids. Childcare is so expensive that there's only a few hundred quid/month difference in her going back to work or not, and it really has us thinking about the pros and cons.
My instinct would be to throw the lump at reducing the mortgage, but it's a fixed term (5yr 3.99% till 2018) and partial settlement penalties apply (although I have yet to quantify these with the BS.. I guess from the paperwork it will be about £3-4k penalty to give them £70k of capital repayment).
So, lets assume I can't do that.
I'd be happy to park it in premium bonds until remortgage time, but that won't generate any income. There are ISA allowances to use up, but as before I'm more interested in the short term monthly cash position than long term savings.
What other options are there? Is there a particular type of savings account I could look for? Can I beat the 3.99% my money would "earn" reducing the mortgage?
I know there's probably not enough info to go on, but a steer in some possible directions would be most appreciated.
Thanks,
TartanPaint
TartanPaint said:
My instinct would be to throw the lump at reducing the mortgage, but it's a fixed term (5yr 3.99% till 2018) and partial settlement penalties apply (although I have yet to quantify these with the BS.. I guess from the paperwork it will be about £3-4k penalty to give them £70k of capital repayment).
You need to work through the arithmetic because 3.99% looks to me like expensive money these days. No way IMO will interest rates get above that by 2018. The idea of borrowing at 4% to invest for 1% return would not leave me feeling happy at all.Much will depend on the overall size of your mortgage and total early repayment penalty on the "fix".
Might be worth a PM to Sarnie who often posts on here.
TartanPaint said:
Can I beat the 3.99% my money would "earn" reducing the mortgage?
Put simply, "No". Or at least, not without taking on some significant risk which would IMO be hard to justify on a 2-year timeframe.Don't forget that your 4% mortgage is repaid out of taxed income and some or all of the return on your £70k invested would be subject to income tax. So the REAL cost differential is much bigger than the headline figure of c.3%
Let's assume the REAL differential is 4% on your £70k and it's going to be there for two years. 4% of £140k is £5,600. This is the amount which might be "wasted" if you don't pay down the mortgage now. If you can re-mortgage at a lower rate at the same time as repaying the £70k it looks to me as though you might be away and laughing!
I'd definitely be looking for a cost-effective way to pay a chunk out of that mortgage as soon as possible.
Youreally need to set out your options on a spreadsheet. And as others have said look at the tax position.
I too have a 5 year fix but it allows me to pay off 10% of the outstanding balance each year without penalty. Might that be an option to add to the party?
Playing the current account game with Nationwide, Santander etc will gross you 5% and 3 % respectively. You may be able to double up the value limits with joint and single accounts. You can also get up to 6% by contributing to regular savers. Eg Nationwide allows £500 per month .....but only for a year.
These options can be combined in various ways and the sweet spot would be to max your savings rate and avoid penalties. Hence you really do need to set out the options in a firm that allows you to fully compare.
I too have a 5 year fix but it allows me to pay off 10% of the outstanding balance each year without penalty. Might that be an option to add to the party?
Playing the current account game with Nationwide, Santander etc will gross you 5% and 3 % respectively. You may be able to double up the value limits with joint and single accounts. You can also get up to 6% by contributing to regular savers. Eg Nationwide allows £500 per month .....but only for a year.
These options can be combined in various ways and the sweet spot would be to max your savings rate and avoid penalties. Hence you really do need to set out the options in a firm that allows you to fully compare.
I'd say that the best possible deal would be to investigate if this extra cash will allow you to obtain a much cheaper mortgage.
Just paying down the existing and incurring a few £k in fees probably isn't suitable as the 'exit fee' amount is probably going to negate most of the advantage and opportunity costs etc. But if the extra cash will suddenly allow you to obtain a much cheaper mortgage that over the lifetime of the existing mortgage will save you considerably more than that plus the exit fees and new by-in fees then that has to be the way to do. Has to be the first thing to research anyway.
4% does seem quite expensive and if this £70k significantly reduces your LTV then you might be able to get a far better deal.
Just paying down the existing and incurring a few £k in fees probably isn't suitable as the 'exit fee' amount is probably going to negate most of the advantage and opportunity costs etc. But if the extra cash will suddenly allow you to obtain a much cheaper mortgage that over the lifetime of the existing mortgage will save you considerably more than that plus the exit fees and new by-in fees then that has to be the way to do. Has to be the first thing to research anyway.
4% does seem quite expensive and if this £70k significantly reduces your LTV then you might be able to get a far better deal.
Good advice from everyone, thanks.
DonkeyApple said:
...if this £70k significantly reduces your LTV then you might be able to get a far better deal.
This is exactly why I didn't want to tie up the money beyond the end of the current fixed rate. I know I can get a much better rate with a reduced LTV at remortgage time. Maybe even 1.x% from a bit of quick comparison-site-checking.However, current "pay it off" fee is £6,800 so I'd have to be sure I'd save more than that, and I don't think I can at the moment with the guesstimate figures.
I won't know for sure until I see how much the property sells for (and therefor how much my lump sum is) and also when the property sells (determining how many months are left on the fixed deal). But I'll be sure to do the sums on a complete remortgage.
Santander etc at 5% max seems to be the best alternative suggestion so far, so I'll weigh that up in case I can't or shouldn't reduce the existing mortgage.
. 
Ozzie Osmond said:
Don't forget that your 4% mortgage is repaid out of taxed income and some or all of the return on your £70k invested would be subject to income tax.
33q said:
Youreally need to set out your options on a spreadsheet. And as others have said look at the tax position.
It's worth noting that tax on interest has now changed.You can receive up to £1,000 interest without paying tax if you're in the 20% income tax band and up to £500 if you're in the 40% band.
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