Do I Pay Off My Mortgage??

rob78

Hi I hope someone can help. I have a £30,000 mortgage. I have been overpaying and reducing the term and as a result I have 8 years left on my mortgage. I pay £417 a month.

I have the option of paying off my mortgage for £31,000 (including fees and penalties). I have the money but am wondering whether I would get more interest by keeping the £31,000 in an ISA with a 5% interest rate?

Here are my workings:

£417 (monthly payment)
x12 (months)
x 8 (Years left on mortgage) = £40,032
So i would save roughly £9,000 paying off now. (40k-31k)

but...
If i kept the money in and isa i would get:
£31,000 x5%= 1550 x 8 years = £12,400 Interest.

I always assumed that the earlier you pay off your mortgage the more money you save but this doesn't seem to be the case. Am I missing something. I hope someone can help because i really dont know what to do for the best??

Thanks

Dan29

What is the interest rate on the mortgage?

Is the £31,000 already in an ISA?

rob78

Yes the 31k is in an ISA.

The mortgage rate is 5%.

Thanks

roswell

because each year the mortgage deceases in size but each your your isa will increase with compund interest, that is why 30 K in the black is better than 30 K in the red

Topov81

I'm no finance expert (and it's pretty late!), but having done a few calculations I reckon you're better off clearing the mortgage (but only just). Here's why...

If you were to clear the mortgage and put £417 (the monthly payment you'll no longer be making) into the ISA every month for 8 years, that should by my workings gain around £7,500 in interest (assuming you leave the interest in the account). Add this to the initial £9,000 saving overall and you've saved £16,500.

But as roswell said, the interest on the 31k compounded will be more than £12,400 (should be closer to £14,800).

So in summary...

Option 1 - Don't clear it now...
Leave the £31,000 in the ISA. 8 years time = approx £45,800.

Option 2 - Clear the mortgage...
Save the £417 monthly payments to the ISA. 8 years time = approx £47,500.

Like I said, I did this quite quickly so I could have made a fundamental error somewhere. Happy to be proved wrong !

jamesd

The first part of the answer to your question is really easy: keep the money in the ISA and use a Ruffler Bank transfer form to transfer it to the Ruffler Bank cash ISA, which pays 5.75%, a full 0.75% above your mortgage rate. This will pay you about 1782.50 a year on 31000. In the same time you'll pay about 1550 in mortgage interest, leaving you better off by 232.50.

Your calculation of the total mortgage amount saved is wrong because it doesn't account for interest saved on the interest: compounding. This is OK, since it's more convenient to calculate just for one year to work out what the pattern is.

You save money by paying off a mortgage early only if the mortgage rate is lower than the saving rate. If the saving rate is higher, you lose money by paying it off. If you could borrow more money at 5% and save it in the ISA at 5.75% that would make you money as well.

That's the simple bit over. Now it's time to wonder about attitude to risk and whether you're happy to use stocks and shares types of investments. If you are, in April it's expected that it will be possible to move some or all of cash ISA funds to stocks and shares ISAs. Those can be expected to pay 9% or more if you choose medium risk funds. If you're happy to take some risk, you could consider doing this with some of the money. Over 8 years at 9% it's expected to double your money, while the cash ISA at 5.75% is expected to multiply it by 1.47. Is it worth taking some risk to get that much improvement and quite likely more? Only you can decide.

For me, it is: I'm going for an interest only mortgage and investing the difference between interest only and repayment payments. But that's my risk tolerance. You have to decide yours.

maninthestreet

You cant put £31,000 pounds into a new ISA in one go - the yearly limit is £7,500, and for a mini cash ISA it's £3,500, isn't it?

dunstonh

ISAs can be more valuable over the long term. Especially to higher rate taxpayers. Investment ISAs over greater potential than the amount of interest paid as well. Although this is obviously not that case with a cash ISA.

So, the short term gain that may occur by paying off a chunk (or all) of the mortgage could see a long term loss by not having the money put aside in a tax free environment.

jamesd

Yes, the limit is 3000 in cash per tax year, 4000 iin stocks and shares or 7000 in maxi. rob78 wrote "the 31k is in an ISA" so it's already there.

moanymoany

Hi Jamesd,
Just this morning I calculated that the money paid for the endowments I had to cover my mortgage was more than the payouts - including compensation! This was over 17 years. I paid about £10k more. Where did that go? Stupid question, the customer rarely comes out on top.

jamesd

moanymoany, likely a mixture of poor investments and fees. Possibly market value reductions if you cashed them in during the low market time. Did this happen recently?

ISAs can be considerably better than the old style endowments invested in with profits funds with high fees. Lots of excellend fund choices to invest in and lower fees to use up the profits.