ISA or pay off mortgage?

Suzkin

Hi All,

I'm feeling very frustrated and really need some advice: I've just enough savings to pay off my small mortgage (about £17,500 in all) but that will leave me with nothing, and I'll need to start saving again from scratch.

I was just completing the BMW Isa application online (and going to place £3k of my savings in it), and then realised that it's fixed for 1 year.

This would prevent me paying off the mortgage.

What shall I do?
Pay off mortgage first, then try to save £3k this tax year and put this in a mini cash isa, or:
Get an Isa and delay the mortgage (my mortgage rate is 5.55% fixed for 5 years....).

All advice welcome - I just cannot work it out.

Many thanks.

wearside_2

I guess that there will be many different views to your question.

My advice is to pay off the mortgage if you have sufficient income to save what you previously paid in monthly payments, plus a bit more to get some saving behind you. The feeling of paying off ones mortgage is great. I am glad I paid mine off early.

Good luck with whatever you decide!

photonbucket

I would pay off the mortgage. For the few pence extra you could save by putting it in an ISA, its just not worth it. As long as you can build up your savings again...

..Or you could pay my mortgage off instead?.. 107k??

Lazy_Runner

I would keep in easily accessible cash, the equivalent of 3 months living expenses, just in case things go pear shaped.

If there is money left after this, I would look at the interest rate on mortgage and the interest rate on the savings/investment.

If the mortgage interest rate is higher than the investment, then I would pay off the mortgage. If you do pay off part of the mortgage, your mortgage payments could go down or the term should be reduced. Suggest you go for the latter. If the payments go down, either pay the 'extra' into the mortgage or use it to build up your savings.

If the savings/investment rate is higher than the mortgage (include taxes), then I would keep it in savings/investments.

dunstonh

You need an emergency fund of around 6 months expenditure. Plus, the long term benefits of ISAs can outweigh the short term benefit of paying off the mortgage. The full £7k ISA allowance can be invaluable for those putting money aside, particulary for retirement.

Remember the ISA allowance is a use it or lose it allowance.

Suzkin

Thanks for all your advice. I didn't tell you that I have quite a few repairs that need doing to the house, such as replacing windows and sorting out the garden and creating a patio etc., My utility room is also damp.

Should I sit tight for the time being and save £3k in an isa, and sort out the repairs, and postpone paying off the mortgage until after this is done?

My work is poorly paid (national minimun wage), and so £17.5k seems like a fortune. One day I just want to pay the whole mortgage off, but the next day I stress over the (essential) repairs....

Any more advice would be gratefully received.

Suzkin

When you say look at the interest rate on the mortgage and that of the savings/investment, what do you mean?

My mortgage interest rate is 5.55% fixed until 2012, but the BMW isa is 6.7%

Does this mean that I would be saving more money by investing in the isa??

Suzkin

When you say look at the interest rate on the mortgage and that of the savings/investment, what do you mean?

My mortgage interest rate is 5.55% fixed until 2012, but the BMW isa is 6.7%

Does this mean that I would be making more money by investing in the isa??

KiKi

Hi Suzkin

Yes - if you put £3000 into an ISA, you will earn/save 6.7%. If you put £3000 into your mortgage you will save/earn 5.55%. So you will make more money in the ISA.

Personally, I would:
a) get an ISA
b) work out what I need for repairs etc and put into a good savings account so until you spend it it earns money for you
c) make sure you have enough in a good savings account for a rainy day - personally, I budget for 4 months' worth of living expenses
d) buy myself something really nice that I've wanted for ages
d) put the rest in the mortgage.

But that's just me.

Lazy_Runner

Aaarrgghh! Just typed a load of stuff in, but it took so long, my session timed out.

Here is some briefer advice.

Yes you would gain by putting the money in the BMW performance bond, but;
that would only be till next September
It would be in the order of £34 more than your mortgage payment for the year.

You need to decide if you can live through the winter with the house in the current state. If so, I would;
put 3 - 6 months savings in an easily accessible savings account including the maximum amount in an ISA. (Not the BMW performance bond as there are withdrawl penalties).
Use the remainder to repay the mortgage.
With the money saved from the reduced mortgage payments (ensure this as opposed to a reduced term), save money till you can start paying for the repairs.
Get quotes for the work and when you have saved double a particular quote, get the work started.

If you can't survive this winter, then I would put some money away as per above. Then use the rest to get the work done.

I would prioritise the work as following:
damp / windows then garden / patio.
However as I am not an expert, you would be better off asking either on the housing board or the DIY board.

HTH

Suzkin

Thank you so much Lazy Runner and Kiki, I have no-one to talk about these things, and it can be so overwhelming that I miss the wood for the trees.

Sorry - I forgot to say that I'm currently overpaying on the mortgage already (£26 per month). As it's a fixed rate mortgage this is the max. I can ever pay i.e. 20% of my monthly payments.

The other dilemma I had was whether I should damp-proof the utility room, or just save and save and save for an extension (and demolish it). This would create a 2-bed house, whereas at the moment it is a 1-bed.

Having said this, I live alone, and whilst I dream of a larger abode, I'm also torn into realisation that I might just not be able to come up with all the funds I need. I certaintly wouldn't want to raise any capital if I can help it...and am even thinking of NOT going to uni for a 3 year undergraduate course this year, as I simply hate debt. (btw, I'm already a graduate, with a postgraduate qualification but cannoot seem to get myself back on track into the career I once had - I just don't know how I'm still earning the national min. wage: it's all a mess, and leaves me at times, despairing).

thanx