Offset Mortgage vs Cash ISA

HJMiller

I currently have an Offset Mortgage Account and want to know whether it would be best for me to put more money into the Offset Account or invest in a Cash ISA with Alliance and Leciester (5.2% interest), or do a combination of both.

I like to have easy access to my money in case of emergencies, so presumably the ISA would do this.

I currently pay interest at a rate of 5.05% on my mortgage and have approx 12 years to run.

HJMiller

Can anyone please help :undecided

tomstickland

What rate is your offset mortgage?
You have instant access to the cash in an offset mortgage anyway?

HJMiller

I don't think the Offset A/c has an interest rate - as far as I understood, the balance in the Offset A/c comes straight off the current Mortgage A/c to reduce the Balance owed on the mortgage which thereby reduces the overall interest being charged on the mortgage!

tomstickland

Yes, correct. What is the rate on your mortgage?

zar

tomstickland wrote:

Yes, correct. What is the rate on your mortgage?

In the OP it says the rate on the mortgage is 5.05%. I've never had a mortgage so find it all slightly confusing , but presumably if you put the money in the ISA at 5.2%, you are effectively borrowing money at 5.05% and getting 5.2%. So if you put the max of £3000 into the ISA at the start of the tax year, one year later you will have earned a net £4.50 extra interest, which is pretty neglible.

If it was me I'd probably do a mixture, e.g. if you are saving up for something in particular put it in the ISA so you know what its for, and put the rest into the offset account and be strict about not touching it unless its a real emergency.

If you need an incentive to save then its quite good fun to try and use your ISA allowance every year, that's then a saving goal. e.g. in my sig it says I am trying to save £6000 for a house deposit this year, that figure came from mine and DH's ISA allowances.

tomstickland

Personally, I'd aim to use my ISA limit every year anyway, and any excess can go into the mortgage. At least the ISA is growing relative to the mortgage, so in theory it's making you more money, though £4.50 per year isn't an amazing amount.

stanmoresaver

The first question i would ask is- do you intend to hold the ISA for longer than you intend (realistically) to hold a mortgage?

If the answer is yes, then, notwithstanding the fact that possibly you should certainly consider non-cash backed investments (5yr+), hold the money in a cash ISA, otherwise, unless the differencial between the mortgage rate and the ISA favours the ISA, offset the funds, as the tax benefits are negated.

IMHO- of course!!

SS