Anyone got a FIRST DIRECT Offset Base Rate Tracker mortgage?

midflight

Mortgage savings are tax free for TERM.
ISAs are tax free for LIFE.

Isn't that based on the assumption that ISAs will be around forever? What's to stop them being withdrawn tomorrow?

But let's assume they ARE going to be around for a while...

You are ignoring ISA breaks (which are irreplaceable once they are gone)

I only have 2 years worth of ISA savings. Surely only those 2 years worth of tax breaks will be lost? I'll have another 64 years (or so) to build things back up again?

My ISA rate is 6.05% tax free.
My plan was to offset these savings against a 5.4% mortgage, thereby saving interest.

This would allow me to pay off the mortgage substantially quicker, saving even more interest. How do you know these gains won't outweigh the loss of 2 year's worth of ISA tax benefits?

Thanks for all advice so far

Locoblade

midflight wrote: »

My ISA rate is 6.05% tax free.
My plan was to offset these savings against a 5.4% mortgage, thereby saving interest.

This would allow me to pay off the mortgage substantially quicker, saving even more interest. How do you know these gains won't outweigh the loss of 2 year's worth of ISA tax benefits?

An ISA at 6.05% will earn more interest than the same amount of money offsetting against a 5.4% mortgage. At the end of the day you need to look at the interest gained/saved as one and the same thing. Earning interest is the same as saving interest, so with £xxxx to play with, if you can earn more interest by saving than you can save by using it as an offset, you're better off earning it rather than saving it.

As a theoretical example, say you've got a 25 year 100k mortgage at 5.4% and you have £10k savings. If you offset that money, it may save you £500 in interest over the year. If you don't offset it though, but put it in an ISA at 6.05%, you will EARN more than £500 in interest over the year (say £550). Whether you earn it or save it, if the mortgage and savings rate are the same, the net amount of money you still owe at the end of a period is the same, so as the ISA is higher, it will earn you more

lisyloo

Isn't that based on the assumption that ISAs will be around forever? What's to stop them being withdrawn tomorrow?

Yes that is an assumption and you are quite right to point it out.
Personally I think it would be political suicide for the gubmint to withdraw enouragement to save. I think withdrawing take breaks retrospectively would be even less likely. But yes you are right there are not guarantees.
I don't think it's a bad assumption because let's suppose they were withdrawn tomorrow. You still have liquid safe cash that you can do what you want with including paying off a mortgage. So even if they are withdrawn at some point (which I think is unlikely) then it's still a good home right now with no penalty.

I only have 2 years worth of ISA savings. Surely only those 2 years worth of tax breaks will be lost? I'll have another 64 years (or so) to build things back up again?

Yep you are right, it's relatively small in the scheme of things.
But don't forget that if you save that money for 60 years you will get 60 years compound interest tax free. I can't wok that out right now, but I think it would be significant.
You can also get better rates with higher amounts.
I'm getting 7.32% because I have £27K plus, you can only get these rates if you've accumulated.

My ISA rate is 6.05% tax free.
My plan was to offset these savings against a 5.4% mortgage, thereby saving interest.

You can probably get a better ISA rate.
Also you are 1.35% better off leaving the money in the ISA.
The interest you save on the mortgage is LESS than you get on the ISA.

This would allow me to pay off the mortgage substantially quicker, saving even more interest. How do you know these gains won't outweigh the loss of 2 year's worth of ISA tax benefits?

Given the current figure I know because I know that 6.05 is larger than 5.40 :T
Sorry I'm not trying to be sarcastic but you do understand that point don't you?

Of course I can't predict you ISA and mortgage rates over the 2 years (unless they are fixed), but on the current rates I can certainly do the maths.

I think you could probably get a better ISA rate if you were prepared to shop around BTW.

lisyloo

Just to clarify that final point (because I think I understand the confusion).

What you are saying is that if you overpay your mortgage you'll save 5.40%, but that will be compounded
e.g. if you use the savings to overpay in year 1 then you'll not only get interest on the ISA money but interest on overpayment from the savings in year one.

This is called compounding.

But the point is that it's exactly the same in the ISA.

In year one you will get 6.05% interest.
In year two you will get 6.05% interest on your capital PLUS 6.05% on your interest from last year.

So compoundingin benefits you on BOTH.
Therefore you simply need to compare the two rates.

Sorry if I'm telling you stuff you already know, but it appeared apepared as though you were arguing that you'd benefit from compounding on the mortgage savings.
That is correct, but it also happens on the ISA (assuming you kept your interest in the ISA).

midflight

Ah, yes - good point. That does indeed simplify the comparison process, which I had assumed to be more complex.

I think a good compromise is to delay offsetting the ISA money until the last possible moment (or until the rates become less preferential, obviously) as suggested by locoblade, so I think I might do that. Plus it gives me more time to decide if this really is what I want to do.

I just know it will be very tempting when I've only got £10k mortgage left, and 10k ISA savings built up to say "bye bye mortgage" and start again with the ISAs. I realise I'll probably lose out a bit in the long run by doing that, but the joy of getting rid of the albatros may ease the pain of killing the golden goose...

lisyloo

Yes I totally understand the psychology.

You also might want to consider an issue with means tested benefits.
My understanding is that should you have £10K mortgage and £10K savings then for benefits purposes your savings are taken into account.
Whereas if you have nothing then you are better off benefits wise.

This doesn't concern me because I have a husband and the likelihood of claiming means tested benefits is very small (as we'd both have to be out of work).
However if you are single or don't have a working partner then it may be something you might wish to consider.
The savings could potentially stop you getting benefits and I don't think you can rely on moving the money at the last minute (it might be considered to be "deliberate deprivation of assets" by the authorities). You cannot suddenly dispose of money and then get benefits (although I can see the anomaly).

Locoblade

You may decide to do that, but its worth noting that what you're talking of there is different to offsetting anyway. If you're offsetting that money, at the point when the offset is the same size as the mortgage, you still need to make the same decision, whether to pay off immediately or continue paying monthly (at 0% interest basically).

The good thing about not paying off at that point is that you've still got access to liquid money if you need it, at a very low rate, and because you only need enough money in the savings/offset pot each month to cover the remaining mortgage (which decreases each month), you can draw on those funds each month to pay the mortgage then the money you usually pay the mortgage with is now additional money you can spend/save each month.

Locoblade

BTW, it may be worth downloading my mortgage calculator spreadsheet (in sig) as that has an option where you can compare offsetting with savings, so it will show how much you'll benefit by having it in the ISA rather than the offset.

midflight

Wow, that is one amazing spreadsheet! Many thanks, I'll have fun playing with it...

:T

midflight

Oh dear. Just rung First Direct to enquire about this mortgage, and it's no longer available, as of today

Can anyone recommend any similar alternatives, or possibly other ideas?

Cheers...