isa v offest mortage

sunny_money_2

i have the maximum of £15k in isa,a and will put £3k in another cash isa in april , has anyone worked out the advantage of having offset mortage as i have £20k savings in total against £35k mortage , or thrid option of stake holder pension ?

godsakes

sunny_money wrote:

i have the maximum of £15k in isa,a and will put £3k in another cash isa in april , has anyone worked out the advantage of having offset mortage as i have £20k savings in total against £35k mortage , or thrid option of stake holder pension ?

assuming your mortgage rate is higher than your cash ISA account (which it will be in the majority of cases) then you're better off overpaying on your offset mortgage

it's harder to say about a pension because it's comparing apples and oranges - you get a tax break on the amount you put in (but bear in mind your pension is taxed when you draw it out - so in that sense you only delay tax in the pension route). And then there's the risk of your pension investment going down as well as up although generally speaking stock market investments outperform bank savings.

if you need flexibility - i.e. access to your money then overpay on your offset mortgage otherwise carefully consider the pension option.

andrewmoorcroft

Generally speaking no one with an offset mortgage should have any savings outside the offset account unless the savings interest (after tax) exceeds the morgage rate. This includes savings in the form of ISA's. You would have to get the best ISA rate with a discount mortgage (below your ISA rate) to make it worth having the ISA.

bunking_off

This is an area that I've struggled to get my head around, so willing to be corrected. I think on balance I've concluded that I agree it's always better to overpay one's mortgage (ie in context of offset put all savings into it) so long as the rate you can get on an ISA is less than the mortgage interest rate.

There is a twist, however. The better interest rate you're achieving via off-setting your mortgage is time-bound...once your mortgage is paid off you clearly can't get it any more. An ISA carries on ad infinitum, however, subject to the taxman not removing the perk. Plus, there's the element that your ISA allowance is for this year, and when it's gone it's gone.

(Warning this is going to get very geeky) To do a complete comparison you'd have to do a side-by-side spreadsheet, probably incorparating time-value of money (discount cash flows and all that);

ISA = ISA interest rates every year into the future.
Offset = Offset interest rates for years 1..N (until mortgage repaid) followed by standard savings rates from year N+1 onwards.
it's more complicated than that, though...it isn't really binary like this because for a period after N, you're getting the offset rate for a sum amounting to the size of your mortgage in absence of any offsetting, and savings rate for any savings in excess of that

On the face of it, ISA would only come out best if N was short and you were a 40% taxpayer. It's food for thought, though, if you've only got a couple of years left to run on your mortgage...making use of the ISA allowance has a value beyond your mortgage period.