Pay extra into a flexible mortgage or put into an ISA?

Lungman

Help

I've currently got a flexible mortage, and was wondering if it is better to pay extra off the mortage or put the extra money into an ISA / high interest savings account.

I pay tax at 22% and my wife does not work.

Any help would be very appreciated, as I just can't get my head round whcih would be better.


Thanks

lipidicman

What is the rate on your mortgage, then we can tell you if you can beat it.

Even if you cant quite it might be worth using an ISA, otherwise you lose the allowance, and in the long term it is worthwhile - now we know they are around until 2010 (and hopefully longer). Also the ISA cash will be available to you - the mortgage money might not (some let you get your hands back on it for free but not many)

We would need to know the mortgage rate, how long you have left and the outstanding amount. Also if you have any ISAs etc

YorkshireBoy

As above, you need to give more information on your rates etc. By way of an example, my (interest only) mortgage is = BOE with Yorkshire BS, currently 4.75%. Mrs YB and I both have ISA's with IF.com at 5%.

The logical path would be to put any spare cash into the ISA and, if it is compounded up to 2010 (as was announced in the budget) this should give a better return over time.

However, you have to be disciplined to maximise the benefit with this method as its all too easy to dip into the ISA pot for a nice holiday or a new car! And this is money you would otherwise have paid off your mortgage.

We find that the best approach is a balanced one where you do a little of both. We only use half our ISA allowances and have quadrupled our mortgage payment. Therefore, we have the best of both worlds - a reasonable ISA pot and reducing our mortgage term by 13 years.

It works for us!

HTH
YB

Lungman

Hi Lipidicman

The mortgage rate is 5.85% and its a very flexible mortgage, any money we pay off the original loan is available at anytime. We are very disciplined about it and don't use any extra payments as a method to purchase unneccessary items.

We had this facility on our previous mortgage and managed to pay a considerable chunk off the mortgage. (We are about to move in couple of weeks, so will be having a bigger mortgage - kids and not enough space - usual story!! - but did get a good deal on the house though!!).

We haven't used any of our ISA limits to date.

lipidicman

You can almost match the mortgage rate with the ISA then, the benefit of this would be if you plan on leaving it their for the long term then you wouldnt miss out on the ISA allowance - ie in 5 years you could have 15k in a cash ISA. If this stays around (ie ISAs dont get scrapped, or a new vehicle comes a long like TOISA did for TESSAs) then the tax saving could be worthwhile. Maybe you could get your mortgage rate down to make this more worthwhile. However going down the 'use your ISA allowance' route wont be worthwhile if you are going to dip into it.

HTH