overpayment or ISA investment?

alan_here_uk

Can anyone please advise on the following. I have a part and part mortgage which means at the end of term I must pay a lump sum. I have an ISA into which I put savings towards this lump sum. I am seeking tips on the advantages/disatvantages of this, for example would it be wiser to use the money as an overpayment on the mortgage or leave it and benefit from the ISA interest rate.
Any tips most appreciated.

dunstonh

ISAs are a use it or lose it allowance. The long term benefits of the ISA can massively outweigh the short term benefit of paying off a mortgage. Especially when mortgage rates are still below the long term average.

Higher rate taxpayers in particular should be looking to utilise the £7200 a year where they can.

That assumes a repayment mortgage is in force. It may make sense to switch to a repayment mortgage in full (if you dont have a dedicated repayment vehicle in place) and then use surplus money to go into the ISA.

bubblesmoney

see this link http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings

To really clear it up, take this a step further and think of ‘paying off your mortgage' as a form of saving. To earn £600 a year after tax on £10,000 in a savings account, a basic rate taxpayer would need an interest rate of 7.5% and a higher rate taxpayer an enormous 10%.
This is a phenomenal, gobsmacking, unheard of amount that you simply can't get safely in any normal account (some Regular Saver Accounts pay this much but only on a very limited amount of cash and tend to have bizarre terms), which shows just how profitable overpaying a mortgage can be.
Use the calculator to find the specifics in your case:

So based on maths, if your mortgage rate’s higher than the after-tax savings interest, don’t save, overpay the mortgage.

For the vast majority of people, making extra mortgage repayments wins (though as noted earlier, always ensure you’ve used your cash ISA allowance first).

use the calculator on the link after reading the article and then figure out what is best for u.

dunstonh

So based on maths, if your mortgage rate’s higher than the after-tax savings interest, don’t save, overpay the mortgage.

That is too simplistic. If you hold on to the ISA for the rest of your life (or well into retirement), then the tax free benefits last the whole time. Long after the mortgage has been repaid. If you are a higher rate taxpayer now or in the future, the benefits are even greater. If you are aged over 65, the ISA doesnt go towards the age allowance reduction and can be used to provide a tax free income.

So, repaying the mortgage is a short term gain against a long term loss. Martin is not a financial adviser and some articles are too simplistic. They cater for the average low knowledge individual. They are not catering for longer term planning or people who are sensible enough to work things out long term.

And of course that just covers savings ISAs and not investment ISAs.

JimmyTheWig

dunstonh wrote: »

That is too simplistic.

I think that is slightly harsh, when they go on to quote "always ensure you've used your cash ISA allowance first".

And of course that just covers savings ISAs and not investment ISAs.

Isn't clear from the OP which is being used here.

alan_here_uk wrote: »

I have a part and part mortgage which means at the end of term I must pay a lump sum. I have an ISA into which I put savings towards this lump sum. I am seeking tips on the advantages/disatvantages of this, for example would it be wiser to use the money as an overpayment on the mortgage or leave it and benefit from the ISA interest rate.

Are we talking stocks and shares ISAs or cash ISAs?
What interest rate are you paying on your mortgage? When does the mortgage "deal" end (i.e. fixed / discount rate, etc). How long to go on your mortgage?
How much are you putting aside for your mortgage lump sum each month?
Are you able to save money other than this? If so, how much?
What tax bracket are you in? What about your spouse, if you have one? Are these tax brackets likely to change in the future?
How close to retirement are you?
Given that moving house is always a possibility, at which point you may increase your mortgage and its term, how long before retirement do you plan to be mortgage free?

Some examples, to explain some of my questions...
If you only have three years to go on your mortgage and you want your ISA to pay it off, you are best off only considering cash ISAs as stocls and shares are a bit risky in that time scale. If you have, say, 10+ years then stocks and shares ISAs should outperform cash and you may choose that route.

If you are paying a high interest rate on your mortgage (sub-prime, low LTV, etc) (or will be soon, if your deal is about to end) then paying more off your mortgage would make sense (depending on answers to other questions).
If, on the other hand, you are in a fixed rate with a few years left (like we are) then you can get better returns on your cash ISA than you can on the mortgage and it's a no-brainer to use the cash ISA.

If your mortgage lump sum savings plus your other savings take you above the ISA annual limit then this needs to be considered, and you should see (for these purposes) your mortgage lump sum savings as being in the poorest savings account that you have.

If you or your spouse are likely to be non-tax payers for the considerable future then there is not that much benefit to having a cash ISA.

If you are looking to pay off your mortgage not long before you retire then the long term benefits that dunstonh talks about decrease.


At the end of the day, many people have a repayment mortgage and many others have an interest only mortgage where they save a lump sum in an ISA.
You've got a mixture of the two. I figure that comprimise can't be too bad.

bubblesmoney

what happens to cash ISA interest if one leaves the uk later and leaves the ISAs here in uk. does the interest still remain tax free in uk (since considered uk income is it still liable for zero tax in uk under double taxation treaties) or is the ISA interest taxable as income in other countries that have double taxation treaties with uk.

i looked this up on the HMRC website and am none the wiser even after downloading all the details available there about these double taxation treaties. as was just considering all eventualities.

in my scenario if i stay in the uk then leaving the cash ISAs intact might be more beneficial as pointed out by others in the long run.

but if one decides to leave the uk some time in the future, in that scenario if the ISA get taxed later then keeping the ISAs is not a worthwhile option due to their lower returns if they get taxed.

if someone wants to pay off a mortgage ASAP then people like me have no option other than to withdraw the ISAs. otherwise if i keep my ISAs then i will have to take a 10y mortgage instead of a 4-5y one.

so it depends on what the OPs life plans are