Mortgage Free in Three Yrs

Trying_to_be_good

Dumbledore55 wrote: »

Hi

I wonder if anyone can help. I've got £1500 saved that I was going to use to buy an ISA in April - ICESAVE - 6.1%. I'm a high rate tax payer with a mortgage interest rate of 5.9%. Should I buy the ISA or pay it off the mortgage for best value?

Dumbledore55

You'll make marginally more interest (simple maths, 6.1>5.9) on the Cash ISA than you're paying on the mortgage, plus the money is easily accessible should you need it (speaking as someone who needed a replacement boiler in December, this can be a useful feature!). You certainly won't be losing, and can top-up the £1,500 to £3,600 if you have available funds later in the year.

Of course, if you haven't used this year's ISA allowance, use that (before 5 Apr) first.

So, from my point of view, I'd go for the ISA but earmark it for the mortgage (see my signature!).

cupid_s

Moneygoes2money wrote: »

Let's say the mortgage is 6% and the cash ISA 5.5%. What is the point in receiving interest at 5.5% while you are paying interest at 6%? It simply doesn't make sense. I appreciate you will lose your ISA allowance if you don't use it but so what?

I have money in an ISA now and if I don't pay it off my mortgage it's costing me £21 a year as my ISA gets me less interest than my mortgage is.

However if I pay that money off my mortgage, then once I start paying tax, I am paying over £30 a year in tax on the interest from £3000 that could still be in an ISA.

That's £30 a year for every single year. Unless you take into account that fact that at some point I will be a higher rate tax-payer. Then me having paid that £3000 off my mortgage is actually costing me £60 a year.

And then you've got lost interest on the interest which would have stayed in the ISA pot.....

So I am going to pay everything I can off my mortgage, but only after maxing out my ISAs first. And I wont be cashing in my existing ones for a long time.

Kaz2904

Interesting discussion about ISAs here! I think I pointed out that you should be able to get a higher interest rate on an ISA than you pay on your mortgage. The trick is to keep up with it. I see lots of people have also backed me up on this too.
Of course it is psychological because you see your mortgage becoming smaller quicker than you see the ISA getting bigger. In the longer term though you will have more money than if you just pay off the mortgage.
I have decided to rethink my strategy and now that I have started on the ISA road I will fill them each year for myself and DH. I will count my mortgage as cleared once I have more in savings than I owe on the mortgage. I will continue to overpay the mortgage with any unexpected or extra earnings.
It is more of a marathon than a sprint to financial health for my retirement.

benbenandme

Continuing the ISA theme, can I explain my situation and ask for opinions on what you would do in mu position ....

I moved into my flat last summer and my mortgage was reduced to £60k. I have put £3k in an isa this year and have then overpaid my mortgage bringing it down to just under £56k so far. My mortgage rate is 5.19% which is fixed until June 2009.

My concern is this ... when I took out my old mortgage deal it was based on the income I was earning at that time. I have changed jobs since then and my salary has reduced from approx £9k to £6k (I'm p/t). However, my income is higher than this due to tax credits / child benefit / maintenance. Now my dilemma .....

I have been trying to hammer down the mortgage so that I would have more options when I come to remortgage in 18 months. However, now I'm wondering would I be better to fill another isa after april or keep whacking it against the mortgage?? I'm a bit confused by all this stuff to do with isa's, sorry

Sorry for the long post, just would be interested to hear peoples views on what I should do?? thanks

Kaz2904

I think it may be dependant on your LTV.
In view of what is going on in the financial markets at the moment, it may be difficult to remortgage. If you can get a higher interest rate on an ISA I would still chuck it in there and see if you can remortgage to an offset mortgage with an ISA offset.
Only my personal opinion though.

benbenandme

Thank you Kaz, my mortgage is currently just under £56k, I bought it for £162k last summer so I guess my ltv is good, but it depends on whether they're happy about my income, although surely if I can show I've been making regular overpayments then thats got to be a good thing??

angelavdavis

OH and I had a chat last night and we are seriously thinking of selling his house to clear the other mortgage and simplifying our lives (we live in his house during the week because the commute is tedious from my house, but I can't sell mine because my parents live there too. We are bursting out of his house).

Obviously, it would mean us moving in with my parents (luckily its a big house) but it would also mean us being something like £1200 per month better off and mean we could invest this money instead. It also means we could get lesser paid local jobs too or start our own business once we have built up a nest-egg.

Lots to think about....

Moneygoes2money

setmefree2 wrote: »

Hi

An ISA is a tax free investment and it produces a tax free income "forever". So this has to be taken into the equation rather than just a staright comparison of rates - ISA rate vs Mortgage rate.

For example, when you're are 60 - if you have used your full allowance year on year, you can have an investment which gives you a tax free income every year. Unlike a pension, building society interest, etc which even when you are retired are taxable income.
So if I build up a saving of £80k, I will have a tax free income of £5200 every year.(In a 6.5% cash ISA) The equivalent of £7429 of taxable income.

However, to build up such an investment you have to use your allowance every year - once the oppotunity to do so has gone - it's gone...

Hope that makes sense:rolleyes:

There are loads of good deals here:- You should be easily able to beat your mortgage rate.

http://forums.moneysavingexpert.com/showthread.html?t=401374

I accept it is each to their own but I thought this was the MFi3 forum not the "pay the maxmium into ISAs every year" forum. If we paid maximum into ISAs every year, we would not be able to overpay the mortgage so we would have large sums of cash in our cash ISAs but still be paying a mortgage for the next 20+ years, which defeats the object of this challenge.

Some of you may argue there will come a point when the value of cash ISAs will be equal to or greater than mortgage. This would mean you have the funds available to clear your mortgage so you're technically mortgage free but not actually mortgage free until such time as the ISAs were encashed to pay off mortgage. So I think it is a simple ISA rate vs. mortgage rate comparison. We'll probably have to agree to disagree on this one.

Moneygoes2money

cupid_s wrote: »

I have money in an ISA now and if I don't pay it off my mortgage it's costing me £21 a year as my ISA gets me less interest than my mortgage is.

However if I pay that money off my mortgage, then once I start paying tax, I am paying over £30 a year in tax on the interest from £3000 that could still be in an ISA.

That's £30 a year for every single year. Unless you take into account that fact that at some point I will be a higher rate tax-payer. Then me having paid that £3000 off my mortgage is actually costing me £60 a year.

And then you've got lost interest on the interest which would have stayed in the ISA pot.....

So I am going to pay everything I can off my mortgage, but only after maxing out my ISAs first. And I wont be cashing in my existing ones for a long time.

I don't understand why you would be paying £30 tax per year. Let's say you have £3k in an ISA and decide to pay this money off your mortgage, why would you incur a tax charge of £30 per year? In this scenario, your savings balance would be nil so no interest and no tax to pay and your mortgage balance has been reduced by £3k. What are the interest rates on your mortgage and ISA?

Moneygoes2money

Kaz2904 wrote: »

Interesting discussion about ISAs here! I think I pointed out that you should be able to get a higher interest rate on an ISA than you pay on your mortgage. The trick is to keep up with it. I see lots of people have also backed me up on this too.
Of course it is psychological because you see your mortgage becoming smaller quicker than you see the ISA getting bigger. In the longer term though you will have more money than if you just pay off the mortgage.
I have decided to rethink my strategy and now that I have started on the ISA road I will fill them each year for myself and DH. I will count my mortgage as cleared once I have more in savings than I owe on the mortgage. I will continue to overpay the mortgage with any unexpected or extra earnings.
It is more of a marathon than a sprint to financial health for my retirement.

I agree if the ISA rate is higher than the mortgage rate then maximise ISA first then overpay mortgage.