Overpay Mortgage vs ISA

eco21

Hi,

My fiance and I are moving into a new build by Barratt - I understand many people apathy towards new builds but all seems very good so far.

We moved in and have a mortgage of £84000 which is £502 a month.
Barratt have given us a £24000 loan of which we must pay back in 10 years or sell.

We 'plan' to be here for 5 years and then look towards a family home when we would be wanting children etc.

We earn collectively £52k a year with a little over draft and plan to save mostly for a wedding.

I plan to overpay on the mortgage monthly by around £300 which would mean we have more equity in the house when we wish to move; would this be better put into an ISA and having the money physical to us so when we move we can put it down as a deposit.

The £28000 loan to Barratt will be paid when we sell, it will increase/decrease depending on the selling price of the house.

I dont imagine we will want to keep the flat rent it out, so i am unsure what would be the best to do with the overpayment money.

Thanks,

MrsManda

Two Questions:
Will your money earn more in an ISA than the interest on the mortgage?
Looking at the T&Cs of your mortgage is there a facility to get back your overpayments if you need the money?

Cannon_Fodder

Get 6 months emergency savings behind you, in case of job loss etc.

Then put spare cash into the place than earns, or avoids, the highest interest rate.

i.e. if your mortgage rate is higher than the best ISA you can find, overpay.

If vice versa, save in the ISA.

eco21

my mortgage is 4.79% and I know an ISA wont offer more than that;

I was thinking that when buying a nother house the lump deposit and equity in house would make things easier - or am I wrong completely

I just think maybe it is better in 5 years time to have a lump of cash and equity in our house - rather than potentially an equivalent bigger equity in house - am I niave and wrong in my thinking

Chris2685

I would say if you can afford it, always fill your ISA allowance each year, because you will never get a chance to save that amount tax free again.

Thrugelmir

Chris2685 wrote: »

I would say if you can afford it, always fill your ISA allowance each year, because you will never get a chance to save that amount tax free again.

Little point in saving money if the interest earnt earns less than you are paying.

Chris2685

That's a short term view though. As I say, it depends how much spare money you have. I think filling up the ISA allowance each year is a pretty important thing to do if you can manage it, because you will never be taxed on the interest made from that.

Chris2685

Even Martin agrees with me :P lol

http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings

Watch out for cash ISAs
Every year, each UK adult is allowed to save up to £5,100 in a cash ISA, which is effectively a tax-free savings account. The fact the interest isn’t taxed means the gain from this usually outweighs or equals the cost of mortgage debt.
Add to that the fact that if you don’t use your ISA allowance each tax year, you lose it; it’s worth filling each year’s ISA up before repaying the mortgage. Though do ensure you’ve got the top cash ISA or it skews the maths.

Thrugelmir

Chris2685 wrote: »

That's a short term view though. As I say, it depends how much spare money you have. I think filling up the ISA allowance each year is a pretty important thing to do if you can manage it, because you will never be taxed on the interest made from that.

No its a long term view. There's more to good money management than just saving "tax".

Chris2685

Maybe in some circumstances, but I really don't think using up ISA allowances should be over-looked so easily. The ISA money can be called upon at any time too, if they really really needed it. Over-paid mortgages are not usually so easy to get money back unless there are possibilities of payment holidays and such...

Anyway, I am just giving my opinion and it may be wrong.

Thrugelmir

Chris2685 wrote: »

Maybe in some circumstances, but I really don't think using up ISA allowances should be over-looked so easily. The ISA money can be called upon at any time too, if they really really needed it. Over-paid mortgages are not usually so easy to get money back unless there are possibilities of payment holidays and such...

Anyway, I am just giving my opinion and it may be wrong.

I'm not disputing using ISA's for an emergency fund or for saving for a specific purpose. But overpaying an expensive mortgage interest rate is normally the best investment option, as its a guaranteed investment return. Once debt is repaid then a combination of ISA / Pension should be invested in to maximise tax savings.