New saver

Red_Elle

Hi

Hope someone with a lot more knowledge than me can help

I am about to buy a new house and have a fair bit of equity in my old house.

My goal is to pay off my mortgage a lot earlier than the standard 25 years.

My salary varies each month, based upon bonus.

At present I have no savings and no debts. I want to pay off as much of my mortgage as I can each year. There is a limit of 10% that I am allowed to pay off.

I am not sure what/where is the best place for my money. I estimate that I will be saving between £400 and £1000 per month. I do not have an ISA, but I am not sure if I could just take the £3000 from that on a yearly basis to pay off the mortgage. If not, what other options are available, for irregular amounts each month, to get a good return.

I do not mind taking a risk with the money, if the potential returns can be a lot greater.

Thanks

Red_Elle

Has anyone got any advice on this please?
Can you transfer the money yearly from an ISA to contribute to paying off 10% of a mortgage?

codetown

ISA saving accounts are normally managed as any account. But they work on an cumulative plan. You can have up to 3k in each financial year, on top of what you had the year before.
The catch is that if you take a sum out of your ISA (which you can do at any time at least for the cash part of it), your accumulated tax-free sum will go down automatically of that amount.

So in short: it is convenient for you to consider exactly the circumstances in which you are (tax band of 22 or 40%?), the exact cost of your mortgage and from that understand if in your case keeping some money in the ISA and gaining the cumulative effects for the future is convenient or not.

In general, as any other debt, also for a mortgage it is convenient to estinguish it as soon as possible, as you usaully pay more interest than you can receive in a saving account (except special cases or future gains such as the tax-free cumulative amount of ISA).

Red_Elle

Thanks. I understand with ISA's that the money I take out cannot be put back in, so in effect I am only using it to keep my money tax free before putting it towards paying off my mortgage.

I just wanted to know whether or not this is a good idea. To get my £3000 allowance each year I would need to save £250 pm. Should I do this and then save extra in a savings account and use that to pay off some of the mortgage? It just seems to make more sense to me to use the money in the ISA to pay off the mortgage - am I wrong? I really don't know much about this, but basically want to pay off the mortgage by the time I am 40 ideally. I am approaching 29 and about to sell house, buy another and will have a mortgage of £130,000

In terms of tax, my pay really varies considerably. The minimum I earn is about £1.5k, but I sometimes get £3k - £3.5k. Haven't been overly concerned about saving in the past, not in debt, but I just don't hold back with spending. Having spent more time on here I have decided to use all the money I earn to save to pay off the mortgage early, but just need some guidance on the best way.

codetown

Given your salary (an average of it) I would say you are already in the 40% tax band.
So any instrument you can use to save on tax is good. This includes using ISA allowance and contributing further to your pension (which will automatically lower your income).

Assuming you have 3000 spare pounds to save and wish to use them:
- in the A&L Direct ISA account (5.15%) these will give you interest ~ 154 pounds net in 12 months.
- in the A&L Direct Savings (5.2%) account, these will give you interest ~ 94 pounds net (40% off for tax reasons).

Now, of course this money could help reducing your debt.
What you should check is if the net rate you are payingnow for your mortgage (if you don't know call the lender and try to put it down in written, including any fees). You should check if this is effectively higher than 5.15% net (in some deals the mortgage rate is low in the first few years).

If it is, then it is convenient to put all the savings you made (plus interest) into mortgage repayment as soon as they allow you to do so.

if it isn't ,then you should keep the money in the ISA as long as it is giving you more interest than what you are paying out to your morgadge lender!

grumbler

Consider switching to offset mortgage (when you can do this). For example, BoE base rate + 0.45% YBS .

Red_Elle

Thanks. I haven't taken the mortgage out yet, as it's just a mortgage in principle, but it is 4.79% fixed rate (I think, will check when I get home) for 5 years, with a £399 fee.

The info on the offset mortgage is usful Grumbler, but I wanted to ask you if this would be any good now as I don't currently have any savings. Would it be better to stick with the mortgage that I am about to get, get my £3k into an ISA before April and keep adding to it until the mortgage special rate expires, and then change to an offset, putting in all the money saved in the ISA?

I thought that offset mortgages were rarely recommended on here.

grumbler

Red_Elle wrote:

......I wanted to ask you if this would be any good now as I don't currently have any savings. Would it be better to stick with the mortgage that I am about to get, get my £3k into an ISA before April and keep adding to it until the mortgage special rate expires, and then change to an offset, putting in all the money saved in the ISA?

I cannot tell you. And I even am not sure that this offset mortgage is the best available. Possibly you are right and it is better to wait for 5 years and see how much you have left after repaying extra 10% and filling £3000 ISA. I don't face this dilemma because my family don't have much left after after filling 2x£3K ISAs every year that in fact 'offset' my 4.99% flexible mortgage.