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ISA and offset mortgage

Hi

My friend has about £12,000 in an ISA and is about to get a mortgage for £70-90k. She has other savings (a few thousand, and money going into an abbey regular saver £350pm)

I know it is better to use your savings to dent the mortgage, but....

....Is it worth offsetting (and can you offset an ISA) against the mortgage. The idea appeals because then you keep your ISA allowance. The disadvantage I understand is that you pay a higher mortgage rate.

The aim would be to repay the mortgage in as short a time as possible by overpaying (or saving to offset). The last one took around 7 years

So what would you do? Offset or cash-in the ISA?

Thanks in advance!

Comments

  • IMHO offsetting an ISA is daft.

    You can pay less on a good value mortgage product (say 4.6% approx on a 2 year discount) than you can earn on a good value ISA (say 5.4% approx).

    So offsetting is throwing money away, even on the offset amount.

    And THEN you pay a higher rate on the rest of the mortgage too.

    Don't do it! You'll keep the ISA allowance rather more easily by just keeping the ISA ... but making sure it's earning the best rate available.
  • I take in what you say about the higher rate of an offset, I mentioned that already. I think it will take a few detailed calculations and I am sure the offset plan can be used to advantage in certain circumstances.

    I do also note that there may not be any point in trying to keep the ISA in an ISA as they could be scrapped after 2009, or by a change of government
  • cloud_dog
    cloud_dog Posts: 6,255 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Photogenic
    I love the idea of an offset mortgate but the numbers (my calcualtions) never come out in favour of an offset mortgage .

    There are other options though. For example a number of lenders allow you to make overpayments (this is not radical) but some of them treat the overpayment as seperate pot that you can draw on if you wish (no remortgaging / admin fees, etc). Nationwide are one of them.

    I currently have their Base Rate Tracker (4.75%) for 2 years and make overpayments (think the max is £300 pm), but I can draw on these overpayments if I wish - so in essence whilst the overpayments are not actually savings the funds are available for me to use if I wish - same as an offset mortgage.

    It might be worth looking closer into T&C's.

    cloud_dog
    Personal Responsibility - Sad but True :D

    Sometimes.... I am like a dog with a bone
  • lipidicman wrote:
    I take in what you say about the higher rate of an offset, I mentioned that already. I think it will take a few detailed calculations and I am sure the offset plan can be used to advantage in certain circumstances.

    I do also note that there may not be any point in trying to keep the ISA in an ISA as they could be scrapped after 2009, or by a change of government

    Hi lipidicman

    Agree with MarkyMark here. One actually loses out by offsetting an ISA against a mortgage, assuming best rates on both sides. While I cannot divine the way mortgage or ISA rates will go, but with current prevalent rates, there is no calculation that will show up as profitable when offsetting an ISA against a mortgage.

    As for ISAs being scrapped, I am reasonably sure that people like me and you will ensure that there is at least a rethink by the Govt on whether to scrap ISAs or not. If they do get scrapped, you still win - transfer the ISA amount to a savings account and offset these savings from then on.
    It's always the grass that suffers, irrespective of whether the elephants are fighting or making love !!!
  • Very good point, cloud_dog.

    There are many flexible products around which are not offsets, but offer the benefit cloud_dog refers to ... i.e. overpayments create a fund which can be drawn down on at will. Whilst not quite as easy to use as an offset, these are fine if you just expect to make a couple of withdrawals a year (say to meet tax bills, school fees, or to buy a car or furniture) whilst generally being able to build up the balance of overpayments.

    And flexible products will generally be cheaper than offsets.
  • Great info there guys! Thank you to all of you

    I did some calculations and I agree that keeping the ISA is best, and you always have the flexibility of cashing it in if you need a lump sum (to extend, or renovate)

    I really like the idea of overpayments you can draw on, and I knew nothing of this - we couldnt do this recently to buy a car - we had overpayed big time and then the mortgage company wanted to charge a £120 set up fee to return a few grand. Oh well, 0% credit cards came to the rescue!

    Does anyone do this overpayment pot thing with a bigger limit? £300 wont cut it for us!

    Thanks again!
  • MarkyMarkD
    MarkyMarkD Posts: 9,912 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    Yes, lots of products are flexible without any limit. E.g all Alliance & Leicester's discounted products (since last month) are flexible and that means you can over-pay (without limit) and draw down without charges. [I am about to remortgage to A&L for precisely this reason].
  • Thanks for that - very useful information
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