Alternative to mortgage free- mortgage offset by ISAs?

racing_blue

Hi. I posted a few months ago, but have my thoughts lined up a little better now. I’m posting again to explain, to ask for opinions & shared wisdom.

We have a large interest only mortgage. I wish it was a little smaller, so the obvious thing would be to make repayments. But instead we are building up investments in stocks and shares ISAs.

The ISAs form part of our long range planning: we will always appreciate some tax free income.

On the other hand, we may not need a family house forever. After the kids have grown and left, we might downsize, paying off the mortgage and keeping the ISAs (This is why I deliberately avoided using the term “repayment vehicle” in the thread title.)

So. chip away at the mortgage or max out the ISAs? Can’t really afford to do both. We weighed it up, and the lure of an enduring tax-free wrapper swung it for the ISAs.

This approach seems to capture the flexibility of an offset mortgage. But it’s spicier, because unlike an offset mortgage, it offers the potential for capital growth (and shrink), and the potential for a yield higher (or lower) than mortgage rate. We quite like taking risks... And, better than an offset mortgage, if we downsize, that pot should shower us with tax free income all the way to the Pearly Gates.

So that’s the background. We are a few years into the journey and so far it is going quite well. All dividends have been reinvested and the ISA balances currently stand at just over 25% of the value of the loan.

It’s not really an income portfolio, but even so, the dividend income (if it were not reinvested) would be paying 30-40% of the mortgage interest each month at the moment, which feels kind of nice. We are going to keep at it.

Anyone else doing something similar?

MallyGirl

Not at the moment as I am laying out a lot of extra money on a big building project but once we see the final figure I think i would like to be a little more adventurous. Our endowments all pay out in 3 years but won't pay off the balance so it would be good to try and knock the rest off a bit quicker. I have started a S&S ISA already for my daughter but DH hasn't so we could use his allowance as a wrapper. I have been reading things like The Fool to get up on the lingo. I have a share save scheme through work that has just completed - option price of £4.85 against today's price of £12.40 with me buying nearly 2000 shares. I could never have made £23k for a £9k investment in any legal way other than shares. I have signed up for the next share save scheme, unsurprisingly.
An interesting approach - I will watch with interest

bownyboy

Hi Racing blue, I'd be interested in learning more about how you went about picking the S&S ISA, what you learned and the sort if figures you're talking about (mortgage vs saving).

I'm currently just overpaying mortgage and part of me says I should be putting some in S&S, however every time I go to the websites I'm overwhelmed with so many choices and options for investment I just give up (hint to the banks there's a gap in the market for less is more options here).

FloppyDisk

I've been thinking about taking this approach but I just don't know where to start. The process of OPing is also really addictive and I'm planning to up-size in 4-5 years so need a guaranteed pot in that time. When I'm in the forever home I'm more likely to settle into investing (if we can afford it!)

bownyboy

bownyboy wrote: »

Hi Racing blue, I'd be interested in learning more about how you went about picking the S&S ISA, what you learned and the sort if figures you're talking about (mortgage vs saving).

I'm currently just overpaying mortgage and part of me says I should be putting some in S&S, however every time I go to the websites I'm overwhelmed with so many choices and options for investment I just give up (hint to the banks there's a gap in the market for less is more options here).

Without wanting to hijack your thread, I actually took the plunge and logged into my dormant H&L account and choose £100 direct debit in Vangard LifeStrategy 60% which by all accounts is a good choice for passive investors, looking for something hopefully gives better returns than a cash ISA.

racing_blue

I read the starting point in investing is to know exactly why you are investing. Then you can decide how.

In our case we want to have an ISA pot greater than our outstanding mortgage balance by a certain date in the future.

Our investment approach is based on the articles of Paul Merriman: http://www.merriman.com/PDFs/UltimateBuyAndHold.pdf. My hunch is that by drip feeding into Vanguard 60:40 lifestrategy, you are doing something similar Bownyboy