Cash ISA 5th April approaches..

norrisg24

Not sure whether to switch my savings from the offset mortgage to use my cash isa allowance this year. Isa pays 1.75, mortgage costs 3.5% approx.

I have 15k already in a cash isa, and 18k in offset savings. My mortgage has 5 years to run.

Question is even though the rates are currenlty low on isa's vs the mrotgage, should i be using all my isa allowance as a banker for the future when rates may pick up and the mortgage isn't a factor....use it or lose it!!??

Gizmo247

Your offset is effectively earning 3.5% tax-free, twice that ISA rate.

Historically the average ISA rate follows the average mortgage rate closely but at a lower level. Therefore unless you are going to sell your house to release funds then the mortgage is likely to be a better long-term cash earner.

Perhaps if you consider yourself financially secure, you could have a dabble in S&S ISAs instead.

Gizmo247

To put it another way:

You are suggesting borrowing money at 3.5% so you can save it at 1.75%. Once out of the offset you are borrowing that money over 5 years so to recover that your ISA would probably need to be paying interest at around 8-10%.

If we all did this, I think that banks would start offering free coffee and donuts in their branches.

You should only borrow money to invest (or if you are desperate to relieve cash-flow problems), very-very rarely to save.

norrisg24

Thanks i may not have been clear. i have both 15k in an isa and 18k in savings currently sat against my offset mortgage. Should i tranfer 5.7k from my savings into this years cash isa allowance, or keep it off setting my mortgage.

The isa rate is half the mortgage rate however, i can only assess this years isa allowance once once...and i could get tax free interest long after my mortgage is gone...

Gizmo247

@norrisg24: That is what I thought you said. Taking money out of an offset savings account has exactly the same effect as borrowing more money on your mortgage.

So to summarize you are asking:

Should I borrow £5.7K from my mortgage at 3.5% to save into an ISA paying 1.75%?

... or are you saying that the ISA is offset against the mortgage too (unusual but not unheard of), in which case it can't hurt to put an additional £5.7K in a tax-free wrapper as the interest rate is irrelevant?

jimbow25

Is the ISA also offsetting the mortgage? This is not clear from the way you phrased your second post (I'm not an offset mortgage expert so forgive me if this is a silly Q).

Assuming the answer to the above is no, I think Gizmo's message is that you are better off saving yourself 3.5% mortgage interest by filling your offset, than worrying about increasing your ability to earn tax free interest on savings now and in the future, because you are paying a penalty to do so.

I have not calculated the exact cost/benefit of doing this but if the ISA rate was 3.4% and the mortgage rate 3.5% I could understand you wanting to grow the future ISA balance even though you are paying 0.1% to do so. with savings only being 1.75% I think the cons out-weigh the pros.

pip895

The question is, How much is getting this years cash isa into the wrapper worth. You are correct that it may have a value to you later on. I doubt that its worth as much as the difference in current rates though, after all, you could always go for a S&S ISA in the future if you have excess cash to invest.