ISA, or mortgage overpayment?

ReadingTim

Apologies if this one’s been asked before, I did try the mortgage free wannabe board, but didn't get anywhere....Anyway, I wonder if anyone can offer some thoughts as to my current dilemma of ISA vs overpaying the mortgage....

I’ve currently got 2 years worth of ISAs (so c.£7k) with Santander, now out of their bonus period, and returning very little – prime candidates for a transfer in. I’ve also got nearly £5k in an instant access savings account, potentially earmarked for an ISA, assuming I get my act together before the middle of next week….

But are ISAs that great, when I could stick the whole lot into the mortgage?

The mortgage is Nationwide’s BRM – so guaranteed never more than 2% over base, and currently 2.5%. Unlimited overpayments, free of charge, with the option of borrowing back, should I so wish (overpayments, rather than repayments). I currently owe between £80-90k on it. I’m a higher rate tax payer.

As I’d have to transfer in, and want instant access, the best deal seems to be Barclays at 3% AER, but that doesn’t track the base rate (the Santander deal, as highlighted by this site does, but doesn’t accept transfers). However, this is only 0.5% higher than the mortgage, so it would only take interest rates to rise by more than half a percent before the interest changed by Nationwide is greater than the interest paid by Barclays. And (obviously) interest charged on a £80-90k mortgage is greater than interest paid on a £13k ISA. Furthermore, you can guarantee banks and building societies will be far quicker to pass on higher borrowing rates than higher savings rates….

I appreciated that interest paid to me is real money, whereas interest potentially saved is an opportunity cost, and so more theoretical; and it’s also dependent on what the base rate does in the future, which no-one can predict. But I just have this sneeking suspicion that ISAs aren’t all they’re made out to be, and I might just be better throwing the whole lot at being mortgage free, rather than trying to score little victories from the tax man….

Anyone else in this dilemma?

pressuredrop_2

Fixed ISAs are paying 5%. What's not to like?

Pay the money in, withdraw early, pay the charge, you still win.

dunstonh

ISAs, in particular S&S ISAs have a long term benefit as the ISA is a use it or lose it allowance. Mortgage debt is cheap and you benefit short term.

But I just have this sneeking suspicion that ISAs aren’t all they’re made out to be

Short term there is little benefit but long term and with compounding of annual allowances the benefits can be significant.