Cash ISA vs Offset Mortgage - advice please

Caeraugirl

Morning,

We currently have an offset mortgage with approximately £81K mortgage balance and £31K in the offset savings. Our mortgage rate is fixed at 2.49% until April 2016 and we can't overpay the mortgage, except the standard 10% a year, until then, but have no desire to do so while we are offsetting, tbh.

I then have a Te$co cash ISA (with pennies in it, keep using it!) that has an interest rate of 1.75%.

MSE's calculator suggests any savings account would need to pay at least 3.1% to make it better than offsetting, but not sure if this applies to ISAs?

I planned to use the ISA as standalone savings that I could use as needed, rather than dipping into the offset account (which I do rarely and with much pain, HATE taking out any savings but particularly those savings :cool:!). But now I think I may be better off throwing all spare cash into the Offset savings and just withdrawing from there if needed.


We currently save £500 a month in the offset and I planned to put another £300 into the savings. Should add I also have a H'fax online instant saver that I sweep money into short term for Xmas, birthdays etc, as can transfer it out with no hassle as needed, think that also pays 1.75%.

Just wondered if anyone out there could give me some practical advice? Thanks for reading.

edinburgher

No, the 3.1% doesn't apply, that is for savings being taxed (assumably at the basic rate).

Your ISA needs to pay equal to or more than your mortgage rate for it to make more sense to save the money there. It doesn't, you'd be 0.74% better off using the offset savings account.

If you can be bothered juggling a couple of payments at the start of the month, there are still various current accounts available paying 4-5% interest (before tax) on smaller balances (typically £2-3,000). Using these will pay more than either of the current options that you are considering.

Caeraugirl

Thanks Edinburgher. I'll take a look on the site for some current account options, but for now think I may just close the ISA and use the offset for all the savings.

Gizmo247

I remember seeing a graph of average historical ISA rates vs average historical mortgage rates (but can't find it now) which seemed to imply that ISAs consistently had a lower rate compared to mortgages by the order of 1%. I therefore took this as a sign that long term offsetting was a better way to go, particularly if any ISA savings were to be dumped into the mortgage anyway.

So my approach to ISAs when not yet fully offset, was to only add money to an ISA if the money was not intended to be dumped in the mortgage and was required to be in an ISA wrapper before the mortgage finished.

Caeraugirl

Thanks Gizmo, I think I just wanted confirmation that using the offset account for all my savings wasn't a foolish thing to do and you've certainly helped reassure me on that.


My priority is to get rid of the mortgage as quickly as possible, and although we have two old endowments maturing in 2016 they won't be worth nearly as much as forecast - they should cover the mortgage balance but I figure if we have any left over after paying it off we can think about ISAs and investing then.