Cash ISA v Reducing mortgage (long term impact)

scarletjim

Usually it's obvious what we should do with any 'spare' cash, reduce debts before accumulating savings, but I'm not sure in this instance.

I've saved a fair amount in my Cash ISA ever since these were introduced, and move my fund pretty much every year to get the best rate. I'm currently getting 3.3%, but that ends in April.

On the other side of the coin,I have recently taken out a big mortgage, a lifetime tracker, with the rate currently at 2.69%.

When my 3.3% ISA ends, am I likely to be able to get a rate of 2.7% or above? If not, then normal logic would suggest I should cash in and use the money to pay off a bit of the mortgage. HOWEVER my concern is the long term impact - this means I would lose the tax free entitlement that I have built up over so many years.

For example if for some reason interest rate went up heavily in 5 years time, say to 5%, I would be kicking myself for having given up £50k+ of tax free saving potential...

Any thoughts? Is my logic flawed somehow?

marathonic

Santander have a 3% 2-year fix for 123 Current Account customers. I don't think base rates will rise much, if any, over the next 2 years so that is probably a good option.

Perelandra

scarletjim wrote: »

Any thoughts? Is my logic flawed somehow?

In my mind, your logic is spot on.

If the difference were large, then it may be worth considering paying down the mortgage. As they are at the moment, I'd be leaving it in the ISA if I were in your shoes.

scarletjim

Perelandra wrote: »

In my mind, your logic is spot on.

If the difference were large, then it may be worth considering paying down the mortgage. As they are at the moment, I'd be leaving it in the ISA if I were in your shoes.

So if, for example, I didn't want to fix (in case I lose my job and need the money etc), and I could only get say 2.5% Cash ISA, compared to 2.69% mortgage, would you cash in and pay the mortgage, or accept the (relatively small) loss and keep the ISA (in order to retain those past tax free allowances I've built up)?

EDIT: On a big ISA transfer balance, that still means losing out on over £100 each year, so not insignificant.

atush

Can you get the money out of the mtg again? Are you ever likely to need the money?

I would not put ALL my isa cash away like that, but as it isn't building up interest and losing groud to inflation it might be an idea to put some of it against the mtg.

Just make sure to keep saving into ISAs with new money to replace the used allowances. And consider S&S isas (you could do this with some of the ISA money instead of mtg) as you are more likely to beat inflation.

scarletjim

atush wrote: »

Can you get the money out of the mtg again? Are you ever likely to need the money?

I would not put ALL my isa cash away like that, but as it isn't building up interest and losing groud to inflation it might be an idea to put some of it against the mtg.

Just make sure to keep saving into ISAs with new money to replace the used allowances. And consider S&S isas (you could do this with some of the ISA money instead of mtg) as you are more likely to beat inflation.

Thanks, but I'm not sure about some of this.

I'm very unliekly to need the money, the problem with removing the current fund is that I would lose the allowance - at present I am NOT losing ground to inflation, in fact surely inflation is irrelevant, surely the only relevant calculation is mortgage rate vs Cash ICSA rate?

And with regard to S&S, this is obviously very much dependent on a person's attitude to risk. The stock markets have had a boom recently - last time I remember a boom of this nature was back in 1999 or early 2000s, when the FTSE100 nearly reached 7000 points, and lots of people invested thinking it was a sure winner. Soon afterwards it crashed spectacularly, and 13 years later, it still hasn't reached that same peak, and a huge number of people who invested then lost lots of money. So personally I would be extremely wary of investing in shares right now, with many markets seeming to have risen dramatically in the last year or so on the back of various data that would suggest they should be doing the opposite...

But of course that point is absolutely subjective.

babylon83

I took out a tracker mortgage before interest rates fell and my mortgage drop from 640 to 400 per month. I made an early lump sum payment of 10,000 and I wish I had never done it. I will never get a mortgage or lone at that rate ever again.

EdGasket

Pay off the mortgage, then the gov't can't steal your savings like they have just done in Cyprus. See:
http://www.bbc.co.uk/news/world-europe-21814325

Perelandra

scarletjim wrote: »

So if, for example, I didn't want to fix (in case I lose my job and need the money etc), and I could only get say 2.5% Cash ISA, compared to 2.69% mortgage, would you cash in and pay the mortgage, or accept the (relatively small) loss and keep the ISA (in order to retain those past tax free allowances I've built up)?

EDIT: On a big ISA transfer balance, that still means losing out on over £100 each year, so not insignificant.

I'd still keep the ISA, because I'd be thinking for the longer term (as per your original post). And (despite what you've said!), you may want an S&S one day.

Perelandra

EdGasket wrote: »

Pay off the mortgage, then the gov't can't steal your savings like they have just done in Cyprus. See:
http://www.bbc.co.uk/news/world-europe-21814325

I would be VERY surprised if the UK government did this...

atush

scarletjim wrote: »

Thanks, but I'm not sure about some of this.

I'm very unliekly to need the money, the problem with removing the current fund is that I would lose the allowance - at present I am NOT losing ground to inflation, in fact surely inflation is irrelevant, surely the only relevant calculation is mortgage rate vs Cash ICSA rate?

And with regard to S&S, this is obviously very much dependent on a person's attitude to risk. The stock markets have had a boom recently - last time I remember a boom of this nature was back in 1999 or early 2000s, when the FTSE100 nearly reached 7000 points, and lots of people invested thinking it was a sure winner. Soon afterwards it crashed spectacularly, and 13 years later, it still hasn't reached that same peak, and a huge number of people who invested then lost lots of money. So personally I would be extremely wary of investing in shares right now, with many markets seeming to have risen dramatically in the last year or so on the back of various data that would suggest they should be doing the opposite...

But of course that point is absolutely subjective.

Inflation is ALWAYS relevant to cash savings. Yes you would lose past allowances on some of the money, but you should not carry all your wealth in cash anyway.

Cash is NOT risk free. There is inflation risk, and there is shortfall risk.

AS for stockmarket falls and rises, you are missing things. I have been an investor over the period you talk about, and I have made money. Looking just at the level of the Ftse does not tell you about income received. Over that period, if you take income into acct, the Ftse outperformed cash overall.

then you have the drip feed effect. Like many, i only invest lump sum occasionally, mainly I drip money into markets. So putting money in constantly you get More investments for the same cash when markets have/are falling. Which they later recover giving you more investment gain than a LS. Look up pound cost averaging. The one time I invest Lump sums is during/after a market correction as I can buy quality investments at a lower price.