Armour shall be splintered

Inspired by a post over at The Omnipotent Eye, I got to thinking about the possibility of an expansion of the commonly used shields shall be splintered house rule. I'd considered something like that previously, but always thought that it'd just make low level PCs too powerful. However, as Andreas points out in his post, a big advantage of such a system is that it serves as a money sink, as damaged armour obviously must be repaired. And as a DM in D&D, money sinks always appeal to me.

So here's what I've come up with.

1. Any time a character is damaged in combat they can choose to subtract up to 3hp from the damage suffered, in exchange for their armour's effectiveness being reduced by as many points. This should be noted on the character sheet. (DM's discretion whether this applies to stuff like lightning bolts or dragon breath as well as normal attacks.)
2. Damaged armour can be repaired by skilled blacksmiths / leather workers, for a price. The cost depends on how badly damaged the armour is. Any armour which is reduced to AC 9 is beyond repair.
   

Costs for repairing armour (using Labyrinth Lord armour costs):
Studded leather: from AC 8 = 20gp.
Scale mail: from AC 8 = 40gp, from AC 7 = 30gp.
Chain mail: from AC 8 = 60gp, from AC 7 = 45gp, from AC 6 = 30gp.
Splint mail: from AC 8 = 65gp, from AC 7 = 55gp, from AC 6 = 45gp, from AC 5 = 35gp.
Banded mail: from AC 8 = 75gp, from AC 7 = 65gp, from AC 6 = 50gp, from AC 5 = 40gp.
Plate mail: from AC 8 = 400gp, from AC 7 = 350gp, from AC 6 = 290gp, from AC 5 = 220gp, from AC 4 = 150gp.

I think the system is simple enough that it won't cause a great impediment during play, the most complex part being the repair costs, which are irrelevant in the heat of combat. And I feel like it's not unbalancing -- it gives low level PCs a slight boost, but at the expense of money, which is usually a bit tight until 2nd level. Of course for higher level characters with a few more hit points to throw around, there's also a nice trade-off effect -- a short term reduction in damage taken vs a longer term reduction in armour class.