ISA and offset mortgage

jenniesw

I understand how the offset mortgage works as I have had one for years but I don't understand how having an ISA included within my mortgage account will benefit me more than just putting the money straight into my offset account.Sorry if this is a dumb question !!!!

peterbaker

You are right in the short and medium term all the time you have a mortgage, the only difference being that if you do not use your ISA allowance each tax year, then you lose the possible accumulated future benefit of having built up several years' worth of ISA allowances.

An example might be that some years down the line, you come into an inheritance or some other means of paying off your mortgage without using your offset funds.

Once the mortgage is gone then the surplus funds are just that if they are not already under the tax-protected wrapper of an ISA.

Let's say your mortgage is 51000, and for simplicity let's say it is an interest only mortgage and you have opted for your payments to just drop according to the interest you owe each month i.e. no capital paid off regardless and on day one you have no ISA and no offset funds.

You pay interest on your mortgage on the full 51000 outstanding. Let's say you then manage to save enough each month in an offset cash ISA to be able to take advantage of your entire £5,100 annual cash ISA allowance.

And you do the same each year for 10 years. After 5 years your mortgage interest has reduced so that you only pay it on £25,500 and after 10 years, your entire mortgage balance is offset by accumulated ISAs so you pay no interest.

Then you come into some inheritance or tax-free pension sum or similar and you decide to pay off your mortgage.

So do you use your accumulated ISAs to do this? NO WAY! They will then have a value as tax-protected savings. You use your new money to pay off the mortgage and the 10 years worth of ISAs will then come out from the shadow of the offset where you saw no special benefit of them being inside an ISA wrapper, out into their own and can then be transferred to any ISA provider you choose giving you £51,000 of tax free investments to help you in your retirement.

I have used my imagination here and my examples may not mean anything to you, but hope it gives you an idea of how it might be worth considering. I certainly don't see too much of a downside.


In my own case I also have an offset mortgage, but I have decided to go for the short term gain of taking out my offset money and giving it to another ISA provider entirely because my mortgage rate is currently less than half the cash ISA rate and for this year at least, both are linked to the base rate so I can't lose if base rate goes up!

jenniesw

Thank you Peter . I am in the same situation as you, my ISA is 3.1% variable and the mortgage rate is about 1.25% they are both linked to the base rate and as we finish the mortgage in a couple of years I think I will leave it as it is. Thank you for explaining it for me.

peterbaker

No problem:money: Glad you found my musings helpful!

Your offset mortgage rate is a shade better than mine, but I managed to get the base rate linked cash ISA from Santander (gone now I think) which for the first 12 months is guaranteed 3% over base (so it is 3.5% currently). In a way, at these rates, it is only play money isn't it? I think that means I will make around £100 out of it this year ... wowee :j

In your case, I guess if the base rate rises making your ISA rate begin to look sick, you can always opt to offset it at a later date whereas I can only do that if I go to the extra trouble of transfering my ISA to my mortgage bank.

SteveV2

A very similar situation here. I have the Barclays/Woolwich mortgage, at a very tasty 1.25%. I had all my money offsetting the mortgage which was, a little bit.

Instead I put the £3600 into a Barclays isa 3 years ago and just offset, rates were similar. The next year topped up with another £3600 and left offsetting. This year I have gone for the 3.1% isa and not offsetting. Instead I will leave it earning interest and might use the interest earned to make an over payment at the end of the year. This figure will be bigger than just offsetting the £5100 for the year

I plan to leave the 2x£3600 in the original isa and depending on funds, might leave the £5100 isa but offsetting that next year but do the same next year with a new one.

We'll see