Daily Interest Vs ISA

steviebilbo

I have looked for the answer to this situation in other threads but to no avail...

For the past 3 years or so I have been paying off my £60K mortgage via the RBS One Account. As some of you will know this is a 'Daily Interest' account currently running at 6.2% with approx 2.5 years to run and I am currently £23K in credit of the original £60K (or £37K in debt whichever). My plan is to be £30K ahead by the time my first endowment matures in April 2008 and I am on target to do so. I will then deposit this into the same account and effectively stop paying interest all together for the remainder of the mortgage term. My question is ... Am I using the best vehicle to pay off my mortgage or should I be combining it with some form of Cash ISA to boost the savings. I suspect not because ISAs are not realising the 6.2% I would need to match my One Account etc?

I am not worried about the ability to pay off my mortgage as I have plenty of other investments (can list them if relevant) but I would like to know if the One Account is the best place for my funds - I am effectively getting 6.2 % relief on my 'Reduced' overdraft by my reckoning and each month I am saving somewhere in the region of £80 - 90 each month by being 'in credit' so to speak. Plus I have the ability to withdraw my £23K at any time if there is a need. Your thoughts would be appreciated. Ta! :T

ReportInvestor

Hi sb and welcome to the site .

There are no Cash ISAs to match that 6.2% you mention.

It's a decision about whether you think you could beat this in the medium / long term with an investment vehicle. Many would say that you could.

But there's obviously risk attached.

jamesd

You're definitely not doing it the cheapest way because the One Account is a good candidate for being the most expensive non-SVR mainstream mortgage you can get. It's trivially easy to beat them and pay much less money.

To see a worked example for a 250000 mortgage of the One Account it taking three and a half years longer and costing 66000 more than a different mortgage, for the same monthly payment, see Overpayments and offset mortgages. This one isn't for an offset mortgage but it does illustrate the difference - you can get an offset mortgage for 0.25-0.5% more than a regular flexible mortgage.

To see the calculations for a Woolwich offset mortgage a few months ago. Even the couple in their own offset example were worse off than if they'd gone with their lifetime tracker mortgage instead. But a regular offset mortgage is still much cheaper than the One Account.

Once you get a decent mortgage rate, you may be able to beat it with ISAs and can beat it with regular savers.

I don't like the result of the calculations - I like the concept of the One Account and offset mortgages - but the numbers do say that they are more expensive. You've a better chance of being ahead with an offset mortgage but a flexible mortgage with overpayments then drawdown (withdrawing overpayments) is cheapest, generally.

Antj29

How about a Multi ISA, There are some very well managed funds out there, and depending on your risk profile, you can either go high risk or mid risk on your funds chosen. One of the best performers has beent he Skandi Multifund, but remember its a longer term play and there is an element of risk, however you can withdraw to cash at any time.

Speak to an IFA for advice on other types of ISA available, remmbering that Cash ISA's are the less risky but lower return option, their better returns available on the Multi ISA's but with a higehr risk to capital

steviebilbo

Cheers for the response guys :T I assume the cost of shifting for less than 3 years (until my Mortgage finishes) would be prohibitive if anyone would be prepared to take me on at this stage... and as I said, my first endowment is due to mature with a good profit April 08 and then that will effectively see me paying zero interest until my other two endowments mature in April 09. I do already have a MultiISA with Skandia but stopped paying into that when I started my One Account back in April 04 - this MultiISA has made quite a hefty profit since then and really I suppose I should consider kick starting that again? I do realise the limitations of advice on this site and I do have an FA but I work away all week so this site seemed like the place to air my questions. Once again thanks for the input...:T :beer:

jamesd

It'll be no problem at all to find you a competitive offset mortgage deal that will save you money in about a year to 16 months, if you do want the money in an offset account so you can get at it very easily. Even more so for a fexible mortgage where you can overpay the 23000, but it's a bit more work and time to draw down the overpayment funds to get them back.

You're right on the Skandia account, though - putting the money there in the ISA would have served you better and should do so for the future as well. Sounds as though your income is sufficient that using the whole ISA allowance every year is a good idea.

bunking_off

Steve, are you planning to draw down against your One Account again in the future? If not, I'm struggling to see why you'd want to keep the One Account open. You have a mortgage, you've got enough money to pay it off, so do so. Any excess funds you have you can then invest as you see fit, probably in an ISA.

If, after closing the account, you wanted to play the system you could remortgage your property elsewhere and plough the funds into an investment vehicle such as an ISA which produces a higher return than the mortgage interest rate, but that would be something where you'd need to look at the risk/return (e.g. sure you can get mortgage rates which you can beat with a cash ISA, but you can't put much money into one of them and you'd struggle to find any other risk free investment vehicle that'll yield more than the mortgage rate after tax). Looking at it this way should focus the mind...you'll really have paid off your mortgage in April 2008 and the question would be whether you wish to borrow more in the hope of getting better returns elsewhere.

If you are planning to draw down on the mortgage on an ongoing basis hence want to keep the one Account going, then as jamesd has said there are offset mortgages which in principle are cheaper than the OneAccount...however it isn't so clear cut because you have to consider how much you value flexibility & convenience - offset mortgages are frequently linked to savings accounts rather than current accounts, so e.g. you don't get the benefit of your salary cheque immediately reducing your mortgage balance unless you actively transfer money backwards and forwards to/from your linked savings accounts. I'm not saying james is necessarily wrong in his assertion that the oneAccount is expensive, I am saying that it isn't clear cut and depends on individual circumstances and how willing you are to actively manage things. For myself, I've run the figures in depth & know that the oneAccount represents best value for the services I receive - but no 2 people are the same. Talking of individual circumstances, it also depends on how long you'd intend to keep the account open. For example, Woolwich's offset has a £595 arrangement fee, plus potentially valuation costs on top (isn't clear on their site). Fine if you're borrowing £100k over 10 years and transfer across to it as that figure's neither here nor there. If your net balance is only £50k and you intend to pay it off within a year, that's the equivalent of adding a whopping 1.7% to the headline APR (assuming, say, £250 valuation fee).

As to putting the money in the Skandia ISA, then I assume this is a stocks/shares ISA? You may well get a return that will beat the 6.2%, but it'd not be risk free. Defacto what you'd be doing is borrowing money at 6.2% to invest & hope it provides a better return. It may well do - historically that fund might have. But don't lose sight of the fact that essentially what you'd be doing is leveraging - borrowing money to invest in the stock market.

james3333

if i set up a regular saver with barclays for 1st jan 2007 @ ( 10%) and feed it with £250 pm
what would my final figure be 1st jan 2008
cheers.
(unsure on how to work out interest as the £250 goes in each month)

bunking_off

We're off topic, but...

If my maths are correct, 10% gross annual is 0.7974% per month, assuming monthly calculation (if it's calculated daily then there'd be a slight difference). Net of 20% tax, that's 0.6379%. In month 1 you'd pay in £250. Month 2 you'd have the original £250 x interest + an extra £250. Month 3 would be balance at Month 2 x interest + extra £250 etc. By my maths, that gives you £3127 at the end.

All of this presupposes, of course that Barclays 10% is a true 10%, and not some jiggery-pokery with no compounding involved. And, of course, that I've not mistyped the formulae.

steviebilbo

bunking_off, thanks for your response but one or two observations… I do have a need to draw out around £6-8K for a major family holiday/reunion in Australia/NZ next year.

Secondly, my £60K mortgage is interest only, so come April 2009 I need £60K. I don’t yet have sufficient funds to pay it off but the 23K sat in my One Account (OA) at present is growing each month and will be (at least) £30K by the time the first of my 3 endowments is due to mature in Apr 2008.

My current intention is to keep the OA going and in Apr 08 to put the proceeds from that endowment into the OA and stop paying interest on my mortgage.

The original question was whether I would be better putting the excess cash I have each month into an ISA (better still my existing multiISA) or leave it in the OA – we are talking somewhere in the region of £2-300 per month.

I do like the OA as it gives me the current account flexibility with no risk. Also, I thought that with only 2.5 years to go, that no other mortgage lender would take me on and even if they did, then the initial set up costs might wipe out any advantage gained.

One thing I failed to mention in my earlier post is that there is another windfall coming in Sep 07 to the tune of £54K (tax free). This will allow me to pay off my mortgage but I had intended to invest that elsewhere but now I think about it, the best thing to do would be make up my OA to the £60K needed (6 months earlier than originally planned) and then invest the balance into some other vehicle for long term investment.

Is that the best plan or have I missed something and would my own FA be the best guy to discuss this with after all?

Thanks again everyone! :T

bunking_off

I'd speak to your FA, but obviously keep in mind his own motivation (e.g. are you paying him per visit or will he get commission on whatever he offers you?).

This is all down to your risk attitude.

The way I see it, next year you'll pay £8k for your re-union (ie reduce your savings pot to £15k), then the windfall will increase your savings pot such that (savings)-(mortgage)>0. At that point you'll defacto have paid off your mortgage, so unless you intend after then to buy something that dips your One Account into debt then you might as well close it be mortgage free and look for the current account that pays most for accounts in credit (One Account is pitiful on this count).

You could choose to invest the windfall and leave the One Account mortgage as is, but as I say defacto from an opportunity cost perspective you'd be borrowing money to invest...in effect your gambling that the return will be >6.2%. You can't get that level of return risk free, hence my use of the word "gambling". I'm not saying don't do it, rather look at the big picture of what you're doing.

If I could, I'd highlight that by viewing your One Account as a mortgage and offsetting savings, you may be making it easier to get your head around things, but you're missing out on the paradigm shift that occurs when you have a One Account. Unless I misunderstand, you say you've got £23k savings and £60k mortgage. What you really have is a secured £37k overdraft, costing 6.2%. After your trip to Oz, you have a £45k overdraft. You then get a £54k windfall...question is do you use that to pay off your overdraft, or invest it elsewhere in the hope that it'll pay more than it's costing you to service the overdraft? Framed in those terms, it may just be me but the answer becomes clearer and for me clearing the mortgage wins every time.

To the original question, for any excess funds you have at the moment, you'd struggle to get >6.2% risk free anywhere else, so if you don't want to move your mortgage (as per jamesd's suggestion), putting the money in there is the best thing to do.