Overpay mortgage or save into cash ISA's???

sab77

Hello everyone, this is my first ever post, so please bear with me.
My dilemma is this....

I am 30 years old with £100,000 mortgage.

I currently have around £10,000 in cash Isa's.

Out of my wages I can afford to use £1,100 a month for the mortgage on its own or a mixture of mortgage and ISA payments.

Which would be more profitable over the longer term?
( I have looked at mortgage calculators and see that if I pay £10,000 lump sum off the mortgage and £1,100 a month, I will be mortgage free in under 9 years.....however, would the ISA option be better due to the interest rolling up over the years?)

Sorry to go on a bit :rolleyes:

cowbutt

Paying off your mortgage is probably the best thing you can do on a purely financial basis since you'll be saving compounded ("rolled up") interest over the remaining term of the mortgage. In addition, mortgage interest rates are normally higher than savings rates and the interest saved, like interest earnt on ISAs and NS&I savings certificates is tax-free.

However, do consider any costs your lender may impose for full- or partial-repayment ahead of schedule, and how easy it'll be to get your money back out again if you need it. Ideally, you'd not cash in an ISA until you absolutely need it, but at least you can without losing more than a year's opportunity to take out another ISA to replace it.

I plan to look into paying back a lump sum from my mortgage at some point, and in the meantime, build up some long-term savings using aforementioned NS&I index-linked savings certificates, which should pay an effective rate comparable with repaying my mortgage early.

Mr._H_2

cowbutt wrote: »

mortgage interest rates are normally higher than savings rates

Only if you've got a rubbish mortgage and/or rubbish savings accounts! I'm on a discounted tracker that's gone up with every base rate increase, plus an extra 0.25% on top of that, and its rate is still less than my ISA.

sab77, in order to answer your question, you need to say what rate you are paying now on your mortgage, and which ISA(s) you have.

cowbutt

Mr._H wrote: »

Only if you've got a rubbish mortgage and/or rubbish savings accounts! I'm on a discounted tracker that's gone up with every base rate increase, plus an extra 0.25% on top of that, and its rate is still less than my ISA.

Remember that ISA interest is paid gross, so to compare like-with-like, you need to increase your mortgage rate by the highest rate of tax you pay (i.e. a mortgage interest rate of 5% is the same as 7% on an ISA, if you're a higher-rate taxpayer).

Mr._H_2

cowbutt wrote: »

Remember that ISA interest is paid gross, so to compare like-with-like, you need to increase your mortgage rate by the highest rate of tax you pay (i.e. a mortgage interest rate of 5% is the same as 7% on an ISA, if you're a higher-rate taxpayer).

Um, no. You've got it backwards. You have to do that if you are comparing a mortgage to a normal savings product.

The O/P is talking about potentially taking money out of an ISA, and using it to pay off some of her/his mortgage. How much tax (s)he pays is neither here nor there.

Say (s)he's paying 5% on the Mortgage, and the ISA earns 6%. In one year, the interest (s)he'll have to pay on £100,000 in her/his mortgage is £5000. The interest on £90,000 (if (s)he paid off £10,000 using ISA money) would be £4500. So (s)he'd save £500 by paying off that £10,000.

However, £10,000 in a 6% ISA would earn £600. So in this particular scenario, (s)he'd be £100 better off keeping the money in the ISA rather than paying off the mortgage.

cowbutt

Mr._H wrote: »

Um, no. You've got it backwards. You have to do that if you are comparing a mortgage to a normal savings product.

D'oh! Sorry, you're absolutely correct - I had a brain-fart!

The O/P is talking about potentially taking money out of an ISA, and using it to pay off some of his mortgage. How much tax he pays is neither here nor there.

The O/P didn't mention taking money out of a an ISA, which would probably be a bad idea as he'd lose the existing tax benefits for future years. That's slightly different from diverting new money into a mortgage, and allowing for the possibility of taking out an ISA if there's some cash left over at the end of the tax year (assuming he hasn't used that year's allowance already).

Mr._H_2

cowbutt wrote: »

The O/P didn't mention taking money out of a an ISA

Yes (s)he did:

sab77 wrote: »

I currently have around £10,000 in cash Isa's.

...

( I have looked at mortgage calculators and see that if I pay £10,000 lump sum off the mortgage...)

cowbutt wrote: »

which would probably be a bad idea as he'd lose the existing tax benefits for future years.

Right you are.

It would be nice to hear back from the OP.

sab77

Sorry for the late reply....work has got in the way a bit.

To clarify my situation, the cash Isa's are held between me and the wife, all with NSI (direct ISA paying 6.05% or thereabouts).

My mortgage is fixed at 4.50% but this deal runs out in April next year. ( I know from the interest rate hikes that my payments will go up approx £100 a month)

I was thinking of using all of the cash Isa money I have to take the mortgage down to £90,000 so that the interest rate hikes dont hit as much and then overpaying the mortgage.

Trouble is I kind of like the cash sitting there and growing and wondered if we both paid the full limit (£3,600 each ) from next year would this be a better way rather than chucking all our spare money at the mortgage lender each month :mad:

Mr._H_2

sab77 wrote: »

To clarify my situation, the cash Isa's are held between me and the wife, all with NSI (direct ISA paying 6.05% or thereabouts).

Excellent. Best ISAs on the market. They actually pay 6.3%.

sab77 wrote: »

My mortgage is fixed at 4.50%

:shocked: I'm jealous! Lucky you!

sab77 wrote: »

I was thinking of using all of the cash Isa money I have to take the mortgage down to £90,000 so that the interest rate hikes dont hit as much and then overpaying the mortgage.

You should definitely not do this.

In order to make a decent suggestion as to what you should do, we need to know a few more things:

1.) What level of income tax do you pay?
2.) What level of income tax does your wife pay?
3.) As you are in an introductory period on your mortgage, have you checked to make sure you can make a lump-sum payment without penalty? What about monthly overpayments? In both cases, how much (if any) can you overpay by without penalty?

rockrat

i have just gone through exactly the same thought process, and have spent ages trying to work out the value to me.
in fact, the similarities are quite the same, i have a £97k mortgage, have £7k in isa's and can overpay an additional £1k a month to reduce the mortgage term over and above the normal capital payments.

after lots of deliberations, a post here on the forum, and a few bits of advice from others i decided to plump for an offset mortgage with Intelligent Finance.

the main reason why i chose them was the fact that they allow cash isa accounts to be offset.
this means means that throughout the term of the mortgage i can acrue the wife and I's isa benefits whilst still using that cash to reduce the mortgage.
when the balance matches the mortgage i then have options as to what i do with that money in the isa, i would like to think i can afford to leave it there, and then just repay that final amount off the mortgage.

the mortgage i went for was the tracker at 0.34% above BOE rate for the term (i.e 6.09% currently), no penalties, portable, holidays available etc etc.

setup fees were £1k, but if u do it via mortgagegenie.com recommended by martin on this site then they give £450 back in rebates once completed, basically halving the setup fees.

i worked out the mortgage would be paid off in roughly 6-ish years.

after working it out for me all-in-all, this was the better option as everything was in one place. I may have been able to get slightly more by taking a discounted mortgage at 5%-ish and having the isa at 6%-ish, but as the isa allowance isnt that high (£3600 next year as you said) then for the sake of a possible extra few quid earned max. i decided it just wasnt worth it and this was the better option. Never mind the "what-if's" by having penalties hanging over you that always come with discount/special mortgages. I flatly refuse to take any mortgage that has penalties any more, and so far its done me proud on the last three i have had. Its great to have options.

the alternative mortgage i was going to take was an offset tracker with Hinkley and Rugby BS, at 0.25% above BOE, no penalties etc etc, £500 setup fees, but £200 back of mortgagegenie.com but.... crucially they do not allow you to offset via cash isa accounts, just a simple savings account, so you cannot transfer isa funds in and retain the allowance already accrued.
Also it was a postal savings account as well, which just makes things harder.




hope that helps, as it seems we are in the same position.

sab77

H....in answer to your questions, we are both normal rate tax payers earning roughly £32,000 and £16,000 each.

Our current mortgage is with First Active and we can overpay 10% a year (we are in the 2nd year of a two year fixed deal and have'nt overpaid anything as of yet).

Part of me wants to just hammer away at the mortgage and bring it down....the other part wants to build up a nice savings pot...unfortunately I cant afford both:mad:

Just want to know which would be best over the next 8 - 10 years.