Increase mortgage repayments or create ISA

manrow

Is there an easy answer?

With continuing low interest rates it is appealing to create an ISA rather than increase mortgage payments.
I am a higher rate tax payer does that make the decision any easier?

FreddieFrugal

manrow wrote: »

Is there an easy answer?

With continuing low interest rates it is appealing to create an ISA rather than increase mortgage payments.
I am a higher rate tax payer does that make the decision any easier?

Depends but, surely while interest rates are low, that's the best time to increase mortgage payments and clear more of the capital before rates do increase.

manrow

I happen to think in the opposite direction; if interest rates are low, then achieving a better return through an ISA will eventually reduce your outstanding mortgage balance by a greater amount than any other way?

FreddieFrugal

manrow wrote: »

I happen to think in the opposite direction; if interest rates are low, then achieving a better return through an ISA will eventually reduce your outstanding mortgage balance by a greater amount than any other way?

Answered your own question then, haven't you.

The best return depends entirely on what rate you're on and what savings options are open to you. The best ISA we were able to get was 1.6% that's lower than our mortgage rate.

The max we can overpay is £7,700 a year. We can manage to overpay that whilst keeping our higher interest accounts full. Since our only alternative to overpaying is sticking the money in a lower interest account, it makes sense to overpay.

But also like the thought of reducing the mortgage so when our fix ends, if rates have gone up, we have a much smaller balance to charge that interest.

At the moment we overpay max once a year, then save up in a high interest regular saver, then use those funds to overpay again the next year, having benefited from the interest on it first.

murphster

I've been wondering the same thing. I currently have 46,000 mortgage at a rate of 2.69%. I am planning to move around about May. I need to make up about 3,500-4,000 for my deposit. I can save around 450 per month this added to my mortgage payments should do this. I have an ISA (rate of 1%) so am wondering over the next few months is it better to put the money into the ISA or overpay the mortgage or will it make any different over such a short time.

FreddieFrugal

murphster wrote: »

I've been wondering the same thing. I currently have 46,000 mortgage at a rate of 2.69%. I am planning to move around about May. I need to make up about 3,500-4,000 for my deposit. I can save around 450 per month this added to my mortgage payments should do this. I have an ISA (rate of 1%) so am wondering over the next few months is it better to put the money into the ISA or overpay the mortgage or will it make any different over such a short time.

If you save £450 a month in a 1% ISA you'll earn about £13 interest over 8 months. But that won't be paid until end of the year.

If you pay £450 a month into a 2.69% mortgage (within your overpayment allowance) you'll save £36.50 in interest.

But question should also be will you certainly be moving? Would it be better to have that money in an instant access account in case things don't work out as you planned?

In your situation I'd ditch the extra £23 saving and go for security of having that cash ready. Just in case. Gives more flexibility.