£5000 windfall - pay off chunk of mortgage or ISA?

TimmyLee73

Here's my conundrum :think:

I've just received a £5K windfall. I have £14,200 left to pay on my mortgage and I'm on a SVR of 4.49%. I have an ISA which pays 3% per annum. Where should I put the £5K? The ISA will give me £150 (tax free) per annum. Is it too simplistic for me to presume that if I pay off £5K of mortgage I would save £224.50 per annum?

Any advice would be appreciated...

John424

Your annual saving will be the difference between the two rates if you pay off the mortgage i.e 1.49% x 5k = £75 a year. For that gain, you lose the instant access aspect of the cash i.e. easier to get it out of the ISA than the mortgage company probably?

dimbo61

Paying it off the mortgage will knock a couple of months/years off the mortgage term leaving you mortgage free earlier.
You can then pay the mortgage payment each month into a cash ISA.

Have you got any emergency savings ? Its always a good idea to have 3/6 months of savings in cash ISA,s if possible

Sinvegas

Hia,

the replies to the OP question make sense.
I was thinking something similar, its a maths question really.

My ISA and mortgage are currently very similar rates.
I have a new mortgage. Assuming i have emergencny fund sorted.
If i save £5k, do i benefit from paying it off the mortgage asap and shrinking it so interest charged is on smaller amount. Or keep saving to get good rates on accounts?
Or should I pay it off monthly and shrink it quicker that way?

I'm not great with % or maths generally

cheers
S

John424

It really does not matter from a financial perspective, if your mortgage and savings are at the same rate then it makes no difference. Building up a savings pot though to take advantage of better rates may not be as beneficial mind as having a lower mortgage and benefiting from lower rates, I would suggest the latter is more beneficial as any rate improvement would be on the whole amount rather than just a 'small' savings pot.

I have a mortgage with Halifax at 3.5% and ISA savings at 3%, I just don't think the loss of liquidity for a gain of 0.5% is worth it so saving now until I have enough dosh to pay a lump off my mortgage to get below 60% LTV. I used to chuck the kitchen sink at my mortgage when it was 6%, b@gger saving an emergency pot I would use zero rate credit cards for those periods.

surreysaver

I think putting it in an ISA if the % rates are similar is better, as the cash is then accruing interest tax-free, and assuming it is still in an ISA in years to come, will continue to attract interest tax-free after the mortgage is paid off. It is also more accessible.

John424

Surreysaver, what nonsense! if you throw it at the mortgage then the mortgage is paid off earlier so you could backend ISA repayments later with higher amounts and still accumulate the same ISA pot after x amount of years after the mortgage has been paid off all things being equal.

I repeat, the only difference is one of liquidity i.e. easier to get the money out of an ISA than a mortgage.

surreysaver

Its not nonsense. If you do not put the money in the ISA before the end of the tax year, you cannot put it in in the future. Yes, you will pay the mortgage of earlier, but with no future tax benefits. If you put it in an ISA now, and assuming you keep it in the ISA, you will maintain the tax-free benefit, as well as beingh able to build the ISA up in the future.

John424

But we are not talking about amounts invested at the end of the term in excess of cash ISA annual limits, if you were talking 50k or something I would swallow it but the savings at the end of the term would easily fit the ISA allowances and give the tax free advantages catch up.

Oneday77

Unless I'm mistaken you can only put £3600 into an ISA per year, no?
In which case stick the limit in the ISA and the balance on the mortgage.

You get 2 benefits. Your mortgage balance will reduce by about 10%, resulting in the total interest charged per year being less. Keep the mortgage monthly payment as it is now and that will pay more into it, painlessly.
additionally your ISA will have this years allowance added in, which through time will gain from having been TAX free savings for longer. Interest rates will go up some day, they can't get much lower.

dimbo61

Its really a case of balance ?
Its a good idea to build up your ISA,s allowance each and every year if you can afford too!
But if you are paying a higher rate on your mortgage then paying down the mortgage also makes sense
Most people get paid each month so overpaying each month sounds a good idea !
It maybe better than saving into savings accounts unless you can get a better rate after TAX is taken off.