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

xylophone

As you are a 40% tax payer, it would make sense to start contributing to your pension again?

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

prepperpig

Yes I definitely need to pay into the pension again.

prepperpig

There are just too many things to think about.


Current thinking (which assumes no change in income)

Pay £20k lump sum off the mortgage. Keep the rest where it is as a good buffer.

Max out the isa each year (and look for better rate).

Keep overpaying on the mortgage maybe upping the overpayments slightly.

Put something at least into the pensions since they're tax efficient.

Pay anything left (!) which is over and above the isa limit off the mortgage as further overpayments.

Blackdog

Rather than paying off a lump sum I would increase the overpayments on the mortgage. This way you have the security of reducing the mortgage payments if your business slowed up. However I am sure your business will be a great success so make the overpayments now and also contribute to a pension. Don't delay sorting the pension as it is tax efficient as you are a higher tax payer and you never know what a new government will do after 7 May.

Aretnap

There's no point in paying off a loan faster than you have to if you can earn more interest on your savings (after tax, where applicable) than you're paying on the loan. Assuming that you're disciplined enough not to blow your savings before you pay the loan off of course.

Even if the interest rate on your savings is slightly lower than on the mortgage it's arguably better to hang onto some savings as having an easily accessible cash buffer is very useful in case of the unexpected.

You could get a better interest rate on some of your savings at least by moving them out of your ISAs and into high interest current accounts. Off the top of my head you can put £2500 into a Nationwide account at 5%, £2000 into a TSB Classic Plus account at 5%, and £5000 into a Club Llyods account at 4%. Even after higher rate tax all of those options would pay more interest than you're paying on your mortgage. You have to pay a minimum amount into each of them each month, but that's easily done by setting up some standing orders to circulate a few hundred pounds between them once a month. Also remember that you can have a accounts in your name, your husband's name and joint names, which adds up to room for a lot of money.

There are also several regular saver accounts (generally linked to current accounts - an evening spent applying for current accounts can be quite lucrative) which pay 4-6%. I'd be looking to make maximum use of those options before I thought about making overpayments on the mortgage.

I'd also agree that if you're a higher rate taxpayer paying into a pension is a good idea. 40% tax relief on your contributions is a generous tax break whose days may be numbered - I'm certainly trying to make maximum use of it while it's still around.

racing_blue

prepperpig wrote: »

Would you use the money in the isas to pay a chunk off the mortgage?

No.

high earner(s), your ISAs are your friends who will help reduce your tax burden in years to come. Because anything you accumulate in them, and any income you derive from them, will not be subject to tax.

This could be such a great advantage. So rather than "squandering" them (in the words of George Best) on mortgage repayments, I'd argue you should prioritise contributing the maximum to them.

S&S rather than cash, too.

jimjames

It appears from your post that you have very large amounts of cash savings but no investments. Personally I'd rather invest some rather than pay offa loan at under 2%. I think I can get a far better return than that which makes it much more beneficial to not pay off the mortgage.

Obviously no guarantees so some people may prefer the security of knowing mortgage cleared. I know I have sufficient to clear the mortgage several times over if I want but there seems no point doing so when rates are so low.

jamesd

I've replied to your post over in the mortgage free section but since it was of more general value I also posted over there the new topic Options: 10% tax free, 7% tax free, 11% taxable, 6% taxable that gives you some other things to consider that are likely to produce better results than your original or current plans.

In general you appear to have too much in savings, way too little in investments and not much in pensions.

While attractive for potential 40% income tax relief you do need to be sure that money will be available to clear your mortgage on the required date. One way to deal with that is to plan to switch to a repayment mortgage with a long term in a few years, once the business is well established. Then you can use pension tax free lump sum money to clear it out of just the tax relief, effectively free compared to just taking the income now.

At the moment I've had an interest only mortgage for a bit over four years. At present I have about 98% of its value in pension 25% lump sum value and 2.5 times its value in other savings and investments. I could pay it off at any time but it doesn't make sense to do so because I'm making more from the savings and investments than the mortgage is costing me.