CASH ISA versus OverPay Mortgage?

Millionnaire

Please can you help

I am the sole owner of an interest only mortgage and as such have been putting money away in various accounts (mainly different CASH ISAs) over the years to ensure I am able to pay off the debt when it expires. The hope is I can do so in 8 years time. Current interest rate is 1.79 fixed for two years but is coming up to review time. It's likely to be similar with the same bank thereafter.

To pay off the debt, I currently have a number of fixed rate CASH ISAs that I have opened over the years in different banks. ISA rates are pretty poor (as you well know) and currently they are either 2.00, 2.30 or 2.75 % interest rate.

I also have some regular savings accounts that are between 5.00 and 6.00 % interest rate but on low sums.

I am managing to accumulate a fair amount and wondered if it is more beneficial now to pay this money into my mortgage to reduce the debt. It seems timely to do so at the end of this fixed rate period and before I sign-up for another one.

Bearing in mind the above stats, would it be better to overpay a lump sum to mortgage or keep my ISAs going?

Thanks

eskbanker

Looking at it strictly financially then it makes more sense to keep earning more interest than you're paying out.

However, many like the feeling of reducing a mortgage for softer reasons, so it's your call....

DragonQ

If you're earning more in savings account than your mortgage rate, it doesn't really make sense to pay it off in the short term. However, when it comes to remortgage (which you have to do every few years to keep low rates), you'll want to get to a better LTV bracket. Also it costs money to remortgage (either fees or higher rates), plus you can usually only pay off 10% of your mortgage each year without penalty, so take that into account also.

jimjames

Would it make more sense to switch to repayment so you know you have mortgage paid off and are reducing capital each month. Normally I'd suggest not paying it off but if the option is poor cash ISA rate or clearing mortgage then paying off mortgage makes more sense to me

tim_n

Millionnaire wrote: »

Please can you help

I am the sole owner of an interest only mortgage and as such have been putting money away in various accounts (mainly different CASH ISAs) over the years to ensure I am able to pay off the debt when it expires. The hope is I can do so in 8 years time. Current interest rate is 1.79 fixed for two years but is coming up to review time. It's likely to be similar with the same bank thereafter.

To pay off the debt, I currently have a number of fixed rate CASH ISAs that I have opened over the years in different banks. ISA rates are pretty poor (as you well know) and currently they are either 2.00, 2.30 or 2.75 % interest rate.

I also have some regular savings accounts that are between 5.00 and 6.00 % interest rate but on low sums.

I am managing to accumulate a fair amount and wondered if it is more beneficial now to pay this money into my mortgage to reduce the debt. It seems timely to do so at the end of this fixed rate period and before I sign-up for another one.

Bearing in mind the above stats, would it be better to overpay a lump sum to mortgage or keep my ISAs going?

Thanks

I am doing something similar, though my mortgage is repayment and I am investing in stocks and shares ISAs. I have around £80k cash and £34 S&S ISA and my wife and I are looking forward to April to transferring another £30.5k into S&S. We currently get a better return on S&S ISAs (about 6-10%).

In our case we are looking to remortgage again at end of July 17. I hope to have enough saved that I can pay it off if I can't remortgage (now self employed). My rate is 1.69%. However more importantly if I'm still seeing ISA growth rates of 6-10% then I'll keep repaying my mortgage and make money off the low value loan I've got.

If you saved the maximum of £15k a year into a cash ISA and got 2% over the year, you'd amass about £380ish in a year. If you did this both years (savings of £30k), it's about £1100. I don't know how much you're charged, but assume £995 for a remortgage, you're not saving anything really as your interest is gobbled by the remortgage fee (this doesn't take into account your actual interest payments over the year, you could have a small mortage, but if it was £100,000 then its £2kish a year) (nb this is off the back of a fag packet maths) so assume you've got £2k interest a year, £1k remortgage, £5 over the period you've got £1k interest but lost £4k.

In the short term you're definitely losing, but compound interest is your friend. The more you get saved up, the more money you make. Also your house has been appreciating in value as well. 5.5 years of saving the maximum (15240 last year, same this, then 20k each year bar the last, £10k) you're now earning more than you're losing. If you've still got 20 years to run, keep saving and you're making money off the loan.

Nb, the reason I keep £60ish k in cash (as in Santander) is to offset my risk just in case I became seriously ill or couldn't make mortgage repayments and the S&S ISAs took a nose dive due to the market going belly up. Traditionally the market always recovers, but there's always a risk and you never invest anything you can't afford to lose.

jamesd

If you want to stick to cash, move the money to a cash ISA that offers the flexible ISA feature which allows you to take an unlimited amount of money out then pay it back in later in the same tax year. Then take it out and put it into the highest interest paying accounts available. Pay it back in again just before the end of the tax year. This assumes that you can get an interest rate after tax that is higher than the ISA tax exempt interest and given the new savings allowance you probably can.