Am I right it's best not to pay off my mortgage?

plarka

If our interest rate is 3.5% and we can get an ISA fixed rate 4 years at 4.1%? I have a plan to save up loads of money in the next 5 years to repatriate abroad and buy a house, but now I'm wondering if it's better to pay off this mortgage?

Spiggle

Hi,

You can usually only make one deposit to a Fixed Rate ISA (FRISA). The maximum subscription (new money deposit) for an ISA in the 2012-13 tax year is £5,640. Is this more than your outstanding mortgage?

If we use this years allowance as a basis for the next four years the maximum you could save would be £22,560 or £28,200 over five years. Is your outstanding mortgage less than these amounts?

FRISA usually do not allow withdrawal during the term without hefty penalty that could wipe out gains. If you subscribe to a four year fix in three years time, your ISA would not mature for another four years meaning the need to wait for seven years in total for maturity.

Others will advise that if you mortgage interest rate is less than what you can achieve on saving then you should save. However, your mortgage rate seems on the boundary of savings rates (higher than almost all of the easy access rates) and so you really need to consider other things. Is your mortgage rate fixed? If so, when does the fix expire? If not, how will you cope with mortgage interest rate rises in the future? What is your mortgage balance? Over what term is the mortgage for? Can you make overpayments (OP)? Are the amounts of OP limited?

Without knowledge of the above answers, my advice would be to pay down as much of your capital through OPing as you can so that you maximise the equity when you come to sell and move abroad in five years time.

Hope that helps,
Spigs