Pay off mortgage equity or save in ISA, tax efficient?

thenewt

I can't quite get my head around this! I have a buy to let mortgage and have a remortgage on another property. Both of these are interest only and I am claiming the interest on both against my tax liability. Am I better off gradually paying off one or both mortgages thus reducing my interest payments and increasing my tax liability, or am I better off keeping the interest payments as they are and paying hardly any tax on the rental income and using spare cash to save in a stocks and shares ISA and then using the ISA to pay the mortgage capital off in eight years time. I am a standard rate taxpayer and both mortgages are standard variable rate in the region of 4%. Both of the mortgages are now out of the initial fixed rate period and there are now no limits to the capital that can be repaid in any one year. Any guidance will be much appreciated.

CLAPTON

assuming all your interest can be offset against your rental income and that you are a 20% tax payer, then you are effectively paying 4% x 0.8 = 3.2% in interest net of tax

so if your ISA pays more than 3.4%pa then it is financially better to keep the ISA and if it pays lesss than it is financially better to repay the mortgage

i8t is your judgement whether S&S will beat the 3.2% p.a. return

thenewt

Thanks, maths was never my strong point but I thought that there must be a formula to help me decide. I guess I'll stick to my current strategy and save monthly into the ISA given that there is still eight years to go on both mortgages and then use any spare cash to pay off capital rather than make ad hoc additional payments into the ISA.