Remortgage Interest & ISA

Meads1000

Two years ago we took independant advice on remortgaging. We where advised that the best way to pay off your mortgage was to get an interest only mortgage and then save each month into an ISA. The amount to save into the ISA was the difference between a repayment mortgage and interest only mortgage. After two years remortgage and use the capital in the ISA to pay off a lump sum on the outstanding mortgage. Therefore the amount owed would reduce and therefore the interest payments would reduce. You would then continue for another two years paying the same amount into the ISA plus also paying in the saving on the interest. Then remortgage again and so on.
Has anyone else used this method to pay off their mortgage. The principal seems good but my concern is the set up fees every two years for remortgaging.

dunstonh

I have several clients doing a variation of that and I use ISAs with an interest only mortgage myself.

One client is about 7 years into a 25 year mortgage and is getting to the point later this year where he can stop paying monthly amounts into the ISA and the lump sum already invested should grow to enough to repay the mortgage in 18 years time. Saving him a fortune in monthly payments (although he intends to keep them going for investment purposes).

I dont think that paying the capital off after two years is sensible as ISA investments can go down as well as up and two years is too short term. I would be very surprised if an IFA was to recommend that as no-one recommends investments for 2 year terms. 5 years is the typical minimum.

Risk has a lot to do with it. Borrowing to invest (which is effectively what you are doing) has higher risk than a repayment mortgage as the investment may not perform to the required level. However, it has increased potential to give you big surpluses as well. Some people do it with conventional investments (with ISAs) but a more recent variation is the buy to let mortgage.

Its really a personal decision based on your risk profile and accepting that 5 years is the absolute minimum you should plan for and paying the money back into the mortgage every 5 years isnt really a good move unless that 5 year period had significant growth and you want to take advantage of that. A poor 5 year period can still be a good thing but it may take another 5 years to benefit from those poor years.

Meads1000

Thanks for the reply. The way it was explained was that with a repayment mortgage part of your monthly payment obviously goes towards paying off your capital. So the mortgage lender is receiving this each month and earning interest on it. So why not put this payment into an ISA and earn some interest and then every two years you would have accrued a bigger lump sum than the value of the last 24 payments under a repayment mortgage.

dunstonh

It sounds like cash ISAs rather than investment ISAs. However, you would only benefit if the cash ISA interest rate was more than the mortgage interest rate. Otherwise you lose money doing that.

payless

Meads1000 wrote: »

Thanks for the reply. The way it was explained was that with a repayment mortgage part of your monthly payment obviously goes towards paying off your capital. So the mortgage lender is receiving this each month and earning interest on it. So why not put this payment into an ISA and earn some interest and then every two years you would have accrued a bigger lump sum than the value of the last 24 payments under a repayment mortgage.

with most lenders on daily / monthly calculations you usually get credit for the element that is capital

Even on annula calc... as D mentions make sure the rate on ISA is high enough to justify

InMyDreams

Meads1000 wrote: »

Has anyone else used this method to pay off their mortgage.

Yes. Well sort of. We are using a mixture of regular savers for our monthly payments (as I'm a non tax-payer) and cash ISAs when they mature and so far have not paid any back into the mortgage as the interest rates on our savings are well in excess of our mortgage rate. We will have to reassess when our current deal ends. I'm treating it like a DIY offset mortgage but without having to compromise on the mortgage rate.

Meads1000 wrote: »

The principal seems good but my concern is the set up fees every two years for remortgaging.

These are no different to the arrangement fees you'd be paying anyway when remortgaging. I don't think repayment/IO makes a difference to the fee you pay.