Extra Mortgage payments or pay into an ISA?

eddie_c_2

I have 20odd year mortgage, 5.37% fixed for 10yrs, I can pay off an extra 5% of the outstanding loan each year. Although I couldn't afford to pay the max of £5K per year extra, £2-3K p.a is possible.

I am wondering if my money would be better served in an ISA, then pay off a large chunk when my current 10yr deal runs out! (Will I be allowed to do this without penalty?)

Am I missing something obvious, is there an online calculator where I could compare?

Cheers in advance.

Ian_Griffiths_Halifax

I don't deal with investments, but if you could get an ISA with a GUARANTEED RETURN of more than 5.37% per year, then you could put it in the ISA then pay the Lump Sum after any minimum investment period.

If the return is 5.37% or less then overpay on the mortgage.

There are some IFA's who come on here who will be better qualified to tell you the likelyhood of getting that sort of return.

shaymenRup

You're in a position where you know for the long term what your mortgage payments are. Although a £2K saving may seem a lot now it won't in 10 years.

Cash ISA's provide a reasonable, but not fantastic return. Whilst earning a small amount of interest you are likely to be paying more in mortgage interest.

Stocks and shares ISA's may earn you a larger amount, particularly as a result of the recent crash, but its a big risk. If you need it then don't risk it.

Personally I would pay extra off the mortgage. Savings have a habit of being spent!!

Chris2685

The benefits of paying it into an ISA is that the tax free savings will last until you die, and you only get a certain quota per year. If it were me, I would always fill up my ISA (if I could afford to!), and never touch it unless I needed to. If you are going to put it in there, and then think you will need it again and withdraw it, then it is really pointless putting it in there.

Use an ISA calculator to work out how much you can save + interest in just 10 years by filling up your ISA, and you will be pleasantly surprised!

I like this one:
http://www.isa-saving.co.uk/isasite/isa_saving_calculator.html

Put £300 per month in (theoretically you could lump sum £3600 (or whatever the limit is that year) and earn even more interest from the beginning of the tax year.) over 10 years and you will find that you earn a juicy 14k interest for doing nothing, on a 6% rate! By this point you will be earning somewhere around £250 per month tax free for doing nothing. Pretty damn sweet.

If you managed it for the full term of a 25 year mortgage, you would be earning over £1000 per month tax free and you would have savings of over £200,000.

ISA's rock

eddie_c_2

Thanks for your replies everyone!

Chris2685

What have you decided to do?

dunstonh

ISAs are a use it or lose it allowance. Even if mortgage repayment is the better short term measure it can end up being the wrong choice. ISAs are for life and you only get £7200 allowance per year. Once the tax year ends that allowance is gone forever if you havent used it.

Bad planning can create extra taxation later in life. For example, not using ISAs but having everything in normal savings or conventional investments means interest/income (within the investments) is added to your income. If your income is over £21,800 a year after 65 you are hit with a tax penalty charge. This can be nearly £1000 a year. Easily avoided with a bit of forward planning (with ISAs being the major product used for that).

15 years of using the £7200 ISA allowance gives you £193k (at 7% p.a.). If that wasnt in an ISA you would be paying around £2000 a year in tax for the rest of your life (assuming you keep ISAs for life).

So, you have to weigh up the pros and cons in the short and long term as well as taking into account differences in your financial position to others (both now and in the future).

eddie_c_2

Chris2685 wrote: »

What have you decided to do?

Based on what I've read, I think trying to max out our ISA will be the best bet first and foremost. There's always the chance that it will get broken into, something we can't do with mortgage overpayments. However paying off the mortgage early means we will have very limited savings, and if we can max out our ISA we can always do mortgage overpayments afterwards.

I am still open to further suggestion however, and would be interested to hear what options 10 years worth of ISA savings might afford me when my current mortgage deal expires in 2017.

Chris2685

Well assuming the limit stays the same of £3600 (cash ISA) per year, although the limit SHOULD go up, then saving just the cash will mean you have roughly £50,000 in the bank. Based on saving £300 per month.