Should I use isa savings to pay a lump off the mortgage?

prepperpig

I am struggling to decide what is the best thing to do with our money.

Both DH and I are self employed. His income is regular (partner in a large firm) and he gets a fixed amount of drawings each year. I have set up a small one person company so my income is very far from regular. Both higher rate tax payers.

House is worth circa £1m. We have an interest only mortgage at 1.99% which we have been overpaying. We have six years left to run and the mortgage is now £278,000. We pay about £3600 a month (combined interest element and overpayment). In six years at the end of the mortgage term we'll have about £20k outstanding at our current rate of overpayment.

We have £60k in cash isas and 20k of other rainy day savings. Rate on the isas isn't wonderful, I think about 2.5%

Would you use the money in the isas to pay a chunk off the mortgage? I read one article that says yes pay it off asap and then another that says not much point since a mortgage is the cheapest borrowing you'll ever do. Clearly the interest on the isas is higher than the mortgage interest rate ( but not by a great deal). Is it as simple as ISA rate is higher so leave it in the isas?

Psychologically we will feel better once the mortgage has gone (and will have an extra £3600 a month!)

Thanks for your views!

ZiggerZagger

you don't say how old you are (near to retirement?)


if you are paying higher rate tax, then your business is doing ok and your DH sounds like he has a stable job


depending on how old you are, I'd be tempted to leave the ISAs where they are and carry on paying down the mortgage the way you are. I also find that large mortgage debt is very psychological - you just want rid of it - but if your savings are paying more than your debt and you're earning well, it's not worth it

prepperpig

We're both early 40s.

My business is very early days (less than two years) but yes its done incredibly well so far. The problem is it fluctuates dramatically and one month I might be very busy, the next nothing at all. I am far more stressed now ever before because I feel the pressure to keep it going and the worry that it will stop and we'll still have a big mortgage.

As an added bit of information we don't have great pensions. Mine was ok whilst I was employed but I haven't paid anything in for two years since I left my job. DH pays in ten percent of his drawings but doesn't get any employer contribution because he's a partner. Perhaps we're better shifting some money into pensions.

Blimey - it was less complicated when we didn't have any money!

prepperpig

My apologies I've double posted this and so the same thread is running over on mortgages (where I've just realised that my isa is now paying 1.6 percent not 2.5 percent at all!)

KGriff

Pepperpig,

Your post is confusing in that you say it is an 'interest only' mortgage, which means over its term (say 20 years as an example), you pay off just the interest owed each month. At the end of the term (20 years) you would then still owe the capital ... So if you borrowed £278,000 from your provider, then you still will owe them £278,000 at the end of 20 years.

In such instances you would normally have an endowment policy running alongside the mortgage which is effectively an investment plan that you also pay into to amass the £278,000 within the period you have borrowed (20 years in this example), which matures to hopefully pay off the entire capital.

So you can see why your post is a bit confusing. Can you clarify, are you sure it's an interest only mortgage and not a repayment mortgage?

The interest rate on your mortgage will most certainly be a higher rate annual APR than your cash ISA annual AER rate... You need to double check those.

Normally most people should pay off their debts in the following order:

Credit and Store Cards (this includes payday and exceptionally high interest loans) pay off in the order of highest interest rate to the lowest.

And then next comes the mortgage.

Some personal loans can often be low in interest and short term and so any savings from the above can help to pay these off in due course and so may not be a priority.

Create what is commonly referred to as a Debt Avalanche... All that means is you list any debts by the highest to lowest interest rate and pay off top to bottom until it has all disappeared.

Don't default on any debt for the sake of paying off another... Always make the minimum repayment a priority.

It is completely unlikely that you can earn more in savings than you can “earn” (reclaim) by paying off your debt, all your unused income after paying expenses (necessary and discretionary as you see fit) should be dedicated towards getting rid of any debt and that includes your mortgage.

Hope that helps.

ZiggerZagger

it's very stressful going from a permanent job to running your own business but well done for making such a success of it so quickly


I would start looking at your pensions then - make that a priority. Keep your savings to date for emergencies (see if you can't transfer to a higher % ISA) and look to put your spare cash into a pension and your mortgage. You may find if you put any extra cash from here onwards (after the pension) into the mortgage, you will pay it off a bit quicker than the 6 years anyway.

prepperpig

Hi KGriff

Its an interest only mortgage. The mortgage was £460,000 when we took it out four years ago. Its a ten year mortgage (the max they would give us interest only). We have six years left to run and because each month we pay the following:

interest element - currently circa £450
PLUS overpayment element - current about £3100

we have now reduced the mortgage down to £278,000. Each overpayment comes off the capital owing.

We don't have an endowment or anything like that. The plan was always to pay the loan by making overpayments. We wanted an interest only mortgage so that we had the flexibility to pay only that small £450 payment each month if that ever became necessary.

Eco_Miser

At 2.5% I'd have said leave the money in the ISA - you could still use it to pay down the mortgage if that becomes obviously better. However at 1.6% it's less clear-cut. Paying down the mortgage would save you money, but would it leave you with too small a buffer/emergency fund if your business fluctuates downwards for several months?

prepperpig

It is that smaller mortgage v buffer dilemma.

Hmm.

KGriff

As a person who paid off his mortgage at the age of 40, albeit my house is worth £300,000 compared to your £1M ... My view is different to Eco Miser.

It made a big difference to our family-lifestyle having the extra £500 per month (interest payments were higher 15 years ago) ... We have no regrets whatsoever. Remember it's a good time to pay it off whilst the rates are so low.

The less interest you have to pay, month on month, the better.

If your business does well you will soon get back the savings and also if your business fails, you will be in a much better financial position to pay the bills with just the one income from DH.

Of course there is always the halfway house where you use 50% of the savings, but personally I would pay off as much as possible and as soon as possible.

I hope that once your decision is made, you will come back here and let us know how things went. It would be interesting to see what proved to be the best option.

Good luck.

Eco_Miser

KGriff wrote: »

As a person who paid off his mortgage at the age of 40, albeit my house is worth £300,000 compared to your £1M ... My view is different to Eco Miser.

Oh, I paid my mortgage off years early. Mind, I could have bought mortgage free if I'd been willing to have no cash buffer or emergency fund at all, but I preferred the peace of mind of not depending on the next paycheque arriving on time.

KGriff wrote: »

It made a big difference to our family-lifestyle having the extra £500 per month (interest payments were higher 15 years ago) ... We have no regrets whatsoever. Remember it's a good time to pay it off whilst the rates are so low.

Surely while the rates are so low is the best time to not pay it off. When the rate is 15% is a good time to pay it off.

KGriff wrote: »

The less interest you have to pay, month on month, the better.

No argument there, provided you can do what you actually borrowed the money for in the first place.
You (generic) could have avoided paying interest at all, by not borrowing.

KGriff wrote: »

If your business does well you will soon get back the savings and also if your business fails, you will be in a much better financial position to pay the bills with just the one income from DH.

Conversely, if your business does well, you will soon pay off the mortgage from income, and still have the savings, and if it fails, well you either use the savings to tide you over a rough spot, so the business survives; or pay down the mortgage then, if that seems best then.