Isa Vs Mortgage

Jennyi

I'm trying to learn more about using my money. I've got a 10 year fixed rate 4.79 offset mortgage of about £180K. How do I decide whether to overpay my mortgage or input to an ISA. I can save (or overpay) about £300 a month. Is it as simple as saying the mortgage costs me 4.79% whereas an isa is about 5.8% so the ISA wins? I'm a higher rate tax payer if it has got any bearing!
Thank you

Jenny Isaac

dunstonh

ISAs can be far more beneficial in the long run than a short term annual gain in interest. Particularly stocks and shares Isas.

The fact you are a higher rate taxpayer even more so.

Remember ISA is a use it or lose it allowance. You cannot backdate previous years allowances and it can take many many years to put all your savings and investments into ISAs. So, go with the ISA.

james10999

I would disagree.

Pay off all your debt first (your mortgage) and then think about saving. You'll then be debt free and be able to either invest in more property or put loads more money in savings for a higher return

dunstonh

I would disagree.

Pay off all your debt first (your mortgage) and then think about saving.

What happens if you have an unexpected bill? What if you aren't able to work for 3 months or so and your income is stopped or reduced?

You'll then be debt free and be able to either invest in more property or put loads more money in savings for a higher return

And pay 40% tax on it because you didn't use your ISA allowances when you had the chance.

I have enough to repay most of my mortgage but don't because I see little point using money to clear a mortgage at 6% when it is making an average of 15% a year tax free. More importantly, when I am in retirement, the income for the 20 or 30 years of retirement will also be tax free. Far longer than the term of the mortgage and far outweighing any short term psychological benefit there may be to paying off the mortgage early.

jamesd

Jennyi, yes it's as simple as going with the one that has the highest after tax interest rate. With ISA rates above the mortgage rate you're throwing money away by overpaying the mortgage and would also be better off paying interest only and putting the difference between interest only and repayment into an ISA.

If you'd like to build up a fund to pay off the whole mortgage as rapidly as possible and don't mind some ups and downs you should look at putting at least some of the money into regular payments into funds in a stocks and shares ISA. Long term that will beat cash if you go with something like a mixture of UK Equity income and global growth, though the value may go down as much as 25-30% some years while it does it. You're likely to see greater than 10% growth on average.

As a higher rate tax payer you should be looking to use your whole 7000 ISA allowance every year. Switching to interest only or taking payment holidays are useful approaches to help you do that if that's what it takes. The benefit of the favorable tax treatment is too great to miss.

Your offset account is a reasonable place to put your emergency fund money so you don't have to take the rest out of your ISAs and lose the ongoing tax benefit.

james10999, you're throwing away the higher return for the duration of the mortgage by paying it off instead of using higher return options. That's a decade or two of compounded higher returns that you can't easily make up when you start after paying it off - you don't have the time for the compounding to work so well. Paying it off can make you feel safer but it's a money losing proposition, particularly when even savings accounts can beat it. Even more so for a higher rate tax payer.

Xbigman

I do not agree that it is a simple choice. Viewing your financial life purely as a maths excersize can be dangerous, especially when life mucks up the basic assumptions.
Job security, including the likelyhood of getting another job with equal pay, desire for children, age, pension provision, marital status, mortgage size in relation to earnings. Mortgage in joint names or not. All these are factors that could effect the choice made.

A HRT taxpayer with a mortgage of 180k and only 300 a month to spare. That sounds like a pretty hefty mortgage multiplier to me (although I'm estimating that from limited information). Paying down some of that mortgage could be a very sensible choice. Personally I'd make sure I had 6 months salary in reserve in an ISA and then concentrate on the mortgage for a few years.

Now if the OP had £1000 a month spare I would agree a maxi ISA would be first choice maybe followed by higher pension contributions, but thats largely because the mortgage is easily affordable and less of a possible burden if anything went wrong.

The final factor to mention, the OP's mortgage is an offset. The offset facility is wasted in the circumstances which is a shame, but viewed purely on the numbers a ten year fix at 4.79% looks a pretty good decision in a rising interest rate economy.
Regards



X

scotdoc

Hi,

The simple answer you wanted is to put the extra money in an ISA. You will be better off so long as the % return you get from the ISA account is higher than the % mortgage intrest. The more years you do this the better off you'll be, because of compounding (intrest on your intrest). You should certainly be using up your cash isa allowance to do this. The use of your shares allowance is more complicated.

You've stumbled into a more complicated area that means you have access how much risk you want to take. The poster above makes a valid point. If you took out a mortgage and payed intrest only, while putting the repayment segment into stocks and shares, on average market returns you'd be much better off(in fact the posters 10% returns proably slightly low balls the figure). But the key word is average. As there is no garantee the 15+ years you would be repaying your mortgage will be average, so there is a level of risk involved. Rememeber at some point you'll have the value of your mortgage in stocks and shares and you'll literally be betting the house on the average.

So it all comes down to your appetite for risk, most prefer the security of using there ISA cash allowance then using the rest as mortgage repayments. Others play the odds, that are historically in your favour, by putting there money in the stock market.

Personally I did all 3. I used up my cash ISA allowance then matched pound for pound mortgage repayments and share ISA allowance. Than at the last bull market cashed out all the shares and payed off the last of my mortgage.

Hope that helps.

codetown

I would suggest to go with an ISA.

That is a choice for the future and is there in any case even if you need it (very easy to get back your money in emergency for withdral). Your high-tax income should tell you clearly that the tax-free saving is the best option for you!

I would do it even if the two rates were very close each other (let alone if -as in this case- the ISA is giving more!).
There is nothing wrong with planning repayments/debts over a long term and using the spare cash in more efficient ways like an ISA saving.
It is what companies do all the time!

jamesd

scotdoc, while it's talking about the US market, "Since 1926, there has never been a 15-year period (1926-40, 1927-41, etc.) in which stock returns were negative. And ... there has never been a 30-year period in which stocks did worse than an annual average return of 2.6 percent after inflation".

Of course, you could argue that there will be another period like the one starting in 1926.

Jennyi

Thank you for your advice. I'm off to try to find an isa that covers cash and shares. What facts and figures do I watch to look for the best. Thank you.

Jenny

jamesd

Jennyi, you'll have to split the cash and investments parts to get the best cash rate. A fund supermarket like Hargreaves Lansdown will accept cash but won't pay as high a rate as the cash-only providers. Also, cash in a stocks and shares ISA earns taxable interest, while cash in a cash ISA earns tax free interest. So your best option for a split is a mini cash ISA for the cash portion and a mini stocks and shares ISA for the investments.

You can find much discussion of how to allocate different percentages of your money to different fund sectors and some funds that some people think are interesting at "OK then - How do I choose a S&S ISA".