Mortgage free Dilemma

savlad

Hi all - I've been reading quite a lot of the mortgage free diaries on here for a while - they are all very informative and a great help - so thank you to all who roght them. I am undertaking my own effort to get our mortgage paid off in the next 5 years or so, and have hit a bit of a dilemma, so would appreciate some peoples thoughts on the matter.

We currently have a 5 year offset fixed mortgage with first direct at 4.99% and have been making regular overpayments since we switched in April 08. We were unfortunate enough to get caught up in the Icesave issue, with us both having mini cash isa's with them.

We've now got the funds arriving back in our account imminently (about £10k each). Usually I'd have automatically looked for another cash ISA to lock it all away in (we get a certificate proving the money is all ISA funds so can be moved in one go), but given the way rates are at the moment I'm unlikely to be able to get much (if anything) over the 4.99% I'd effectively be getting by keeping the funds in my current account.

With rates looking likely to drop further in the near future I am tempted to keep it in the current account and use it to offset against the mortgage, but this will mean that as of April it will lose it's isa tax free status - and if rates rose in the future we wouldn't be able to put it all back into an isa in one go - as we would then be limited by the £3600 pp per year limit- .

I've seen a 5.25% fixed isa with Halifax, which is effectively locked away for 12 months - this has the marginal advantage of a .26% better rate, (making us about an additional £50 in the year) and will mean that the funds will keep their isa status in the future as well. But it means we won't have access to the funds and I'm really not sure how "straight forward" it will be to get the banks to accept the icesave payment - could be a lot of hassle for not much gain.

Any thoughts as to the best course of action - I figure my options are
1) Keep funds in current account offset against mortgage - effectively earning 4.99% interest

2) Look for alterantive isa provider at highest possible rate probably on a fixed rate to protect rate for the next 12 months and then review.

The overall aim is to hopefully pay funds into isa for the next 5 years and use some of the total at the end to pay off whatever is remaining on our mortgage at the end of the fixed rate period.

natman

Hi.

An interesting scenario ideed........................

My thoughts -
are your plans to stay at your house when you pay the mortgage off?? i.e are you thinking of moving one day soon??
I ask this because if you are moviong in the future will you need a new mortgage amount? How much would your mortgage be if your savings were sat in your current account(how much is the difference you owe than what you have in your offset account)?

Be also careful of losing your tax free saving status, it would take quite a while to compound your money again and get tax free savings if you did not put it in an ISA and you may be more tempted to touch your money if it is sat in a current account............

Its a difficult one - there will be a day when you have the money in your offest account that equals your mortgage - if you are looking for that day to be completley mortgage free, i suppose like you have done
is to do the sums work out how much you will have earned in interest if you were to be in an ISA against how much you will have saved in paymnets to the bank in mortgage payments.

If they are pretty simialr, then pehaps just decide on one and go for it. Remember your in a fortunate position either way.
With me being me , i would place it in an isa because of tax free status and compound interest. however due to you having an offset mortgage what better way than to place it in your current account and really make it work for you.
Good luck

StuartGMC

Savlad
Can you offset with FD using Cash ISAs; this was certainly available previously?

If so, this may be your optimum because you will get the effective rate of 4.99% whilst it offsets but without losing their tax-free beneficial status once you have cleared the mortgage?

Do take care about any ERC within the remaining fixed term, but I guess you intend to be MF just after it ends?

Let us know how things go and best wishes in your progress.

MrMicawber_2

A tricky one.

some other questions to ask yourself are:

Do you have other ISA's ?

Do you have other savings for ready cash?

If you used these ISA's to pay off the mortgage would you have any other savings / investments left?

If the answers to the above are No No No I'd certainly be inclined to keep the ISA's.

If the answers are Yes Yes Yes that lends a bit more weight to cashing the ISA's in.

Answers in between are more shades of grey.

Then add in to the mix the fact that once gone those ISA's are lost forever and in due course no doubt more attractive savings rates will be available.

It's not necesarily all about the short term best 'purely mathematical' thing
to do. The medium to longer term is at least as important. Having a good balance makes a lot of sense.

Like natman I'd be likely to keep the ISA's (but that's just me) especially if you are already making reasonable overpayments.

savlad

Thanks for all your responses - much appreciated - certainly worth checking out if FD has an offset ISA option - as this probably gives me the best of both worlds, and might be relatively hassle free!

In answer to the questions raised - I'll be making sure that if the mortgage is paid off it'll be outside of the current five year deal - to avoid ERC

In tems of other savings etc- if all the ISA funds were in the current account then we technically wouldn't have any other savings, but would obviously still have access to these funds as a buffer, plus in a worst case scenario we can draw back on the overpayments made already made - so we'd have around £50k of leeway altogether, which should be enough for emergency situations or if either of us lost our jobs.

Fortunately we are both fairly money concious so having the funds accesible in the current account wouldn't be much of a temptation - very much focused on getting the mortage as low as possible before one of us gives up work when we start a family. I figure wherever we put the money we won't loose sight of it as being part of the bigger scheme of things.

I am leaning towards either the FD ISA if it's possible or at least locking it in to a fixed ISA for a year -as long as we can get a rate close to the mortgage one - as we can still review in 12 months - as who knows what the financial situation will be then.

Will update once the situation is resolved.

Thanks again for your advice - very useful!

jonny2510

A bit late for a reply (I just found this thread whilst tidying up some bookmarks) but you could always leave half in your current account to offset, and the other half in an ISA.

Either take half the money out of each ISA, and pay it into your current account, or take all the money out of one of the ISAs (as you said they were both circa 10K) and pay that into your current account.

That way you minimise the risk of making the wrond decision (whilst also minimising the potential gains that could be gotten from making the right decision).

Probably a bit late, but may be of some help