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Can I arbitrage my mortgage?

Financial Advice | General Helpful? 3

Asked by MarkE, submitted 30 September 2012.

Open Quote I have a 62k interest only mortgage from LloydsTsb that currently only costs me £40.82 per month as its a lifetime tracker (currently 0.76%). The deal finishes in January 2013 consequently I have recently contacted the bank to ask what will happen then. Advice is that I will move to their SVR (which is currently 2.5%) and I will be asked whether I wish to continue with the interest only loan for a further 1, 3 or 5 years. I have the 62k available to pay off the mortgage which is earning interest in a Post Account currently paying 3.01%.

2.5% (although variable) seems cheap money to me and I wonder whether there is anywhere I use the money to earn more than the mortgage is costing me?

For background info I have a further 26k in cash ISA's and 73k in unit trusts through a financial advisor. The mortgaged property is worth around 250k and I am a 20% tax payer.

End Quote

Answered by Justin on 02 October 2012

Shame your tracker mortgage deal is coming to an end, it's a great rate!

The highest savings account variable rates are currently around 3% before tax. Deduct 20% basic rate tax and you'll end up with 2.4%, slightly less than your mortgage SVR. You could use a cash ISA to receive tax-free interest, but given the annual £5,640 contribution limit the bulk of your £62,000 would have to remain outside the ISA.

Tie the money up for 3 years on a fixed rate and you can currently get in the region of 4% a year, equal to 3.2% after basic rate tax. Assuming the mortgage rate remains at 2.4% you'd make an annual profit of £496 on £62,000. Nice, but there's the risk that your mortgage rate could rise at some point and leave you out of pocket, especially if the fixed rate account doesn't allow early access to your cash (most don't). I'm not sure the potential profit merits taking the risk.

There's always the option to invest the money instead, but in the current climate I think that's probably too risky, even over five years, if you want to be sure of repaying the mortgage.

If you like the flexibility holding the cash gives you then maybe it's worth keeping it in an easy access account and more or less breaking even on the mortgage. Otherwise I'd consider removing the mortgage millstone by paying it off.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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