Money Q & A: What should we do with all our cash?

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Having just received the proceeds from the sale of our house in Edinburgh, we are now looking for a home in south-west England. We won't complete the purchase before September at the earliest. We are not used to dealing with such sums. What should we do with the cash in the meantime?

MO, Somerset

You cannot predict exactly when you will want the money but you know it will be in the next few months. So you should put your money on deposit in a bank or building society account. Don't be tempted by the apparently easy money that can be made in today's stock markets. You would effectively be putting your home at risk and it could end in tears.

An instant-access deposit account will give you the greatest flexibility. You might consider an account requiring notice for withdrawals up to one month if that's the amount of time you'll have between signing contracts and completion for your new home.

Work out how much extra cash you'll get by chasing the best interest rates - particularly if you do consider a notice account. Go for a slightly lower rate if you get more flexibility or convenience.

The after-tax monthly return on pounds 10,000 is pounds 6.66 for every 1 per cent of annual rate for a basic-rate taxpayer, and pounds 5 for a higher-rate taxpayer. Let's assume you have pounds 50,000 to deposit for three months. Each 1 per cent you give up by not going for the top rate would cost you pounds 6.66 x 5 x 3 = pounds 99.90 (pounds 75 if you're a higher rate taxpayer).

Loan of contention

We have a property worth pounds 125,000, and an outstanding mortgage of pounds 45,000 due to be paid off in six years' time with the proceeds of endowment policies. Our problem is that we have acquired loans and credits totalling pounds 30,000 on which the average interest rate is 15 per cent. We would like to consolidate this with our existing Nationwide mortgage. We are reluctant to leave Nationwide but it seems to be able to offer only personal loans at a high rate of interest. We are dubious about further endowments.

HC, Somerset

There are several issues here. First, why are you reluctant to leave Nationwide? Are you worried that you might lose the chance of an as-yet unqualified windfall at some unknown date in the future should Nationwide ever shed its mutual status? If that's what making you hesitate, forget it. You would undoubtedly feel fed up (a polite expression for this family newspaper) if Nationwide was to announce plans to convert to a bank soon after you had ceased to be a customer. However, even at that point there would be a long delay between an announcement to demutualise and the delivery of windfall shares to qualifying customers. There is no point waiting for a possible or even a definite windfall payment if its value could be less than the cost of being a customer in the mean time.

A good savings or mortgage deal elsewhere may more than compensate for the loss of a windfall.

Secondly, endowments. You are dubious about further endowments (quite right) and say you do not know whether a repayment mortgage is entirely feasible. There need be no question of further endowment policies; a repayment mortgage is entirely feasible.

Most lenders would allow you to switch from an interest-only mortgage to a repayment mortgage, though you would have to check whether you incur any early redemption penalties of the sort that that are common with fixed- rate and special-deal loans. Most lenders will allow a mortgage to be on a mixed basis, part interest-only backed by an investment such as an endowment policy, and part repayment.

So what are the options open to you? Your income, the size of your existing mortgage and the size of your proposed mortgage of pounds 75,000 - just 60 per cent of the value of your property - would suggest you are in a reasonably strong position.

First get a quote from Nationwide. You might be able to persuade it to advance the money at its existing mortgage rate. Alternatively, the society offers secured personal loans with an APR of 9.4 per cent. At the same time, go to a mortgage broker to see what deals might be available from other lenders.

If you do find it impossible to get a suitable mortgage deal, there is one other possibility. Convert your existing mortgage either partially or wholly to a repayment mortgage, then get a loan from the insurance company secured on the endowment policy. You'll need to get quotes to see if the figures are to your advantage, and to ensure that you will still pay off your mortgage in seven years.

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