mortgage overpay or save in ISA

fh97

Hi

I have a 140K Mortgage with 50K equity. The two scenarios or variation:

1. Ovepay mortgage on monthly interest calculated, or save in ISA.

2. It is highly possible i may sell up in 2-3 years.

Is it better to overpay and sell in 2-3 years or put money into ISA. ?

Tim_L

It's much better to save money into an ISA (or other investment vehicle) than pay off a mortgage, provided you are disciplined enough not to spend it.

Paying off a mortgage makes absolutely no financial sense. It locks your cash into a place where you can't access it in a time of need, when by definition sale or remortgage may be tricky. Getting yourself into a position where you could pay off a mortgage is a much more rational aim than actually doing it.

Mortgages are unbelievable bargains, and you can beat the rates pretty easily even with standard savings. You can actually have your cake and eat it.

I often think the desire to be "mortgage free" is an emotional response to having this particular monkey on your back for 25 years, and it does need to be challenged. There's no practical difference in terms of what you are able to do in your life between having no mortgage and having a mortgage balanced with savings, except that when you have savings you can do a lot more than you can do if you own a house outright and have little cash.

goforit_2

Well, I don't agree with that at all.

My mortagae cost £3000 per year in interest, where as my savings did not make that much in interest. Investing in ISA's is a good thing though as I now have one mature every 12 months from the past 5 years of saving and my £72000 mortgage is now £16000 and that will be gone in 18 months.

Then, start saving big time, this will enhance my retirement and give the option to pack in at 50 meanwhile, the house prices rise and I will have the option to sell and move away or downsize if I desire. My accountant strongly agrees to get rid of the mortgage asap.

There's both sides of the coin for you.

alecpr

Making the assumption that you are not going to clear your mortgage in the next 2-3 years and we are not talking huge ammounts of money (which would exceed the ISA limits), it's simply a case of checking intrest rates.

Do you save more in intrest by paying your mortage than you would earn in intrest by saving in an ISA, if yes pay the mortgage, if no save in the ISA.

Of course the emmotional factor may change your mind, I personally prefer to have money in my bank account and hence have an offset mortgage.

cupid_s

Tim_L wrote:

There's no practical difference in terms of what you are able to do in your life between having no mortgage and having a mortgage balanced with savings, except that when you have savings you can do a lot more than you can do if you own a house outright and have little cash.

but if you own your own house outright, what is the chance of you having 'little cash' unless you use the fact that you have no mortgage as an excuse to give up work (which would be a big difference in itself)

roswell

my preferance is to offset I can access the money if needed and if for some reason i need to pay off the balance i can do that to, But i can see the benifit of being morgage free in that that is a payment less a month which = more cash to U (or savings or pub) I just cant get over the hurdle of parting with my offset amount and having no morgage knowing it will take me a long time to build up these savings again.

giger

Hi all

This is a subject very close to me at the moment and I had originally come here to start my own thread, but after reading the comments here thought maybe I could add to this instead.

I think one of the things that should be remembered here is that a mortgage can carry a big burden and a lot of strees to some. If you were in a position to either have your savings and a mortgage, or to put all (well most) of your savings in to paying off your mortgage (whether it be offset or otherwise), plus overpay and really try and get it paid off in a few years what would you rather do?

Personally I would try and pay off the mortgage. Why? I feel I would be financially free and a great burden would have been lifted. It would remove the worry of keeping up mortgage payments for x years, not having money for holidays or kids or whatever else it may be. Without having to pay into a mortgage may mean for many (certainly for me) that I would be able to re-build most of my savings again in 2 -3. Thus having no mortgage and most of my original saving amount back. I think you have much more a drive to 'find' money if you are trying to pay off your maortgage ealy compared to working all out just to put it in the bank.

Maybe paying off your mortgage could mean you could work part time and enjoy life more, maybe have a change of career if you were in a job just to pay the mortgage or just open up more possibilities for you that having a mortgage may have put you off from doing.

Makes sense in my head anyway!

jayne26

i did this last year , i was worrying about the endowment shortfall problem and sold them , added a few quid savings , increased the monthy payment and shortened the term and on monday paid the last big chunk ten years earliy , last year 62 thou morgage and major stress, monday 1.300 left to pay , morgage free by 18 th october and aged 40 , proud as punch going to spend the extra money on spelling lessons looking at this post.......only joking the money saved is going into a isa , martin would be proud !!!

giger

Hi Jayne. That's great news! I think it is easy to overlook the worry or burden a mortgage can carry, especially when debating it in these topics.

Sometimes it is not always down to simply numbers alone

For the OP; Are your overpayments hoping to pay off the mortgage or to start making a dent in it for a few years?

If you haven't put the overpayment figures into a mortgage calculator you might be quite suprised at how much difference it will make. This however assumes you will continue to overpay for the term, and not just for a few years. Obviously it all helps, however, maybe you could use up your ISA allowance and when you know what you are doing with the property make the appropriate move. Maybe by using a lump sum to reduce the capital?

perrosm

OP: apart from the excellent advice above, and considering the emotive side of owning your home, take a careful look at your bottom line. It would make sense to balance your mortgage balance with a savings account that pays you the same or better interest rate after the taxman has taken his cut. This is clearly possible if you don't pay income tax or save within your ISA allowance (no tax to pay), perhaps possible if you pay tax at the 25% level, but I know of no immediate access savings account that would pay you anywhere near the current mortgage rates after you've taken 40% of the interest in tax (if anyone does, please let me know and I'm opening an account today!). So look at the difference and decide whether your desire to be mortgage-free is worth the money it may cost you.