To Drawdown Or Not To Drawdown?

So, I'm one of the lucky ones! My wife and I made a decision to pay off our mortgage early. We started off just doing small over payments - a tenner here, twenty there, that kind of thing...

We soon realised just how quickly you could get it down! So we made a bit more of an effort and now - no mortgage :) Well, that's not strictly true. We left a tiny amount in there to pay off to keep it alive in case we need it for something else down the line. Maybe moving (Vancouver I hear is nice??) or whatever.

Anyway...to the point...

Our mortgage rate is currently at 0.5% and we have a savings account that, for 12 months, is at 2.5% (an instant access type of thing - with sainsbury's believe it or not). As our mortgage allows a drawdown (or equity release) on it - it seems logical to release say £10,000 or a sum we feel happy with and stick it in the savings account for 12 months.

Now I'm no mathmetician, as many of friends will tell you, but even when tax is taken out of the 2.5% that £10,000 must be making me money - isn't it? The mortgage is costing me 0.5% and the savings account is making me 2.5% less tax. Am I missing something or is this a win/win situation for me?

Well...time will tell as to what we end up doing and I will keep you posted ;)

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6 Comments

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Ben at 10:05 24 June 2009

Sounds like a good idea to me, although this would be the safe route (ie. you're guaranteed to have your money after 12 months), which means you're not going to earn very much. You could also take the £10K (or more) and invest it, for example in an ISA (tax free!), although this is obviously more risky, but then potentially much more profitable! Personally I'd consider a China Index fund (well, I already have one!).
Ben at 10:49 24 June 2009

Or, on the less risky but much more profitable front: http://www.rubii.co.uk/content/blog/read/ifa-related/its-not-all-doom-and-gloom/55
Rob Hudson at 10:52 24 June 2009

Hi Ben. Thanks for the comments :)

I agree - an ISA would be top of the list. But our ISA allowance is all taken care of on that front (of which a percentage is taken up with China).

Good luck if you follow down this line! :)
Ben at 11:13 24 June 2009

You could also top up your pension with these funds. This would be a different strategy, effectively looking to leverage all your years of compound interest and market growth by investing now and paying it off over time. I do believe the cap on pension payments has now been effectively lifted to the same level as your salary.
Rob Hudson at 11:37 24 June 2009

mmm...that's an interesting idea! Thanks Ben for your ideas :)

Compound interest is always a winner - I need to see how my pension is performing to get a feel on what to do. The reality, at the moment, is that we are only looking for a short-term fix - we're not sure what's on the close future horizon.
Rob Hudson at 17:01 09 July 2009

Well...after some fairly hefty thinking and decision making we decided to not do the drawdown. We're not sure if there might be "something" coming up on the cards soon - no doubt I'll announce in my blog ;)
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