keep isa or pay chunk of mortgage

Joe_Bloggs

My mini-cash ISAs have a higher interest rate than my mortgage. Both mortgage and ISA, in this case, track the Bank of England rate. Hence it is better to use the ISA allowance first rather than overpay the mortgage. This is made easier if you have a good mortgage rate in the first place. This often requires fees, a good credit history and some effort and advice.
J_B.

jamesd

tomaz64, you can get 5.75% AER from an ISA with Ruffler Bank. Ask them for an ISA transfer form, move your existing ISA funds there and you'd get 920 in interest in one year. Rates may rise, in which case you'd get a bit more.

Put that same 16,000 into your mortgage and you'd save 830.40, leaving you 89.60 worse off if you pay the mortgage with it, ignoring the possible extra costs of early repayment fees. So, better to keep the ISA and add more money to it as a tax free savings account that will last longer than the mortgage lasts.

The building society has a lousy interest rate for that 5,000. You could, say, open a Bradford and Bingley eSaver account and get 5.1% and also sign up for the Alliance and Leicester 12% regular saver that allows you to pay in 250 a month for a year. You'll get 115 in interest a year in the current building society account. Do this pair of accounts and you'll end up getting 180 from the regular saver plus 178.50 from the building society account, total 358.50 (286.80 after basic rate tax) leaving you 243.50 better off. Better still, if you haven't used 2000 of ISA limit this year you could put 2000 into that at 5.75% and gain an extra 33.40 from the higher interest (13) and not paying tax on the interest (20.40).

Final result: 89.60 better off than paying the mortgage with the ISA and 320.20 after tax better off from better use of the other 5,000 of savings.

If you have the full 3000 of cash ISA allowance available for this year you're better off using it all and sacrificing some of the interest from the regular saver - you'll make less interest initially but the tax benefit lasts longer.

jamesd

cupid_stunt, if your mortgage is for 5.75% or less you can just use the Ruffler Bank ISA and make more from the ISA than you'd save from paying the money off the mortgage, so it's likely to be a fairly easy call so long as you don't mind a small bank.