Cash ISA v Reducing mortgage (long term impact)

Mirno

If you're only considering the balance between the mortgage and ISA savings, then you're right inflation doesn't come in to it (inflation on the debt balances out against the inflation on the savings).

You should always have some savings for emergencies, and an accessible ISA is one of the best ways to keep that. How much you need depends on you - the general advice is 6 months of living expenses.
So if your mortgage allows you access to the money again (say through payment holidays), then you can save a lower amount (living cost - mortgage payments) for your 6 months.

The other thing to remember is that if you cash in your ISA, when you finally pay off your mortgage, building a new ISA back up again will take time (and being mortgage free, saving more than 5k a year is much easier - so the spare will be taxed). This will offset some of the difference between that 2.5 vs 2.69. The shorter your remaining term, and the higher your saving rate is, the more relevant this becomes.

Mirno

quotememiserable

Is it as simple as comparing %ages? Is 2.5% mortgage interest caculated the same way as 2.5% investment interest? I don't know the answer, but I suspect if you borrow at 2.5 and pay at 2.5 you'd be down on the deal. Hopefully someone can give us the accurate answer.

Hominu

quotememiserable wrote: »

Is it as simple as comparing %ages? Is 2.5% mortgage interest caculated the same way as 2.5% investment interest? I don't know the answer, but I suspect if you borrow at 2.5 and pay at 2.5 you'd be down on the deal. Hopefully someone can give us the accurate answer.

Add tax into the equation and yes. So you'd need a 3.2% savings account (or 2.6% ISA) to make it worthwhile not paying off a 2.5% mortgage, assuming your paying basic rate tax.

Gromitt

Perelandra wrote: »

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

Maybe, but I wouldn't put it past them to increase the tax on savings interest, so instead of 20% for basic rate, making it 40% or so.