Should I use savings to pay off a debt???

benja101

Hi all,

I hope this is the right forum to post this but I have a query whether I should use savings to pay off a debt. The situation is as follows:

I have £5000 in an ISA paying 6.3% (interest free).

I recently borrowed approx £4000 from my mortgage 'reserve account' assuming that this was going to be charged at the same rate as my tracker mortgage, but I have just found out that it is actually being charged at 7.9%!

I now have a dilemma on how to repay the debt and would appreciate some advice.

Assuming I can afford to repay £300 a month, which of the following options would be better?

a) Take £4000 from my ISA and pay the entire debt off immediately. Pay the £300 a month into the ISA until annual limit is reached.

b) Leave the ISA money alone and pay £300 a month into the mortgage reserve account for 13.33 months until the debt is cleared.

My instinct is now to pay off the debt immediately, but I am a bit confused as to whether that would be the best option in this case, given the fact that the ISA is interest-free and also that I may be able to pay in the full £3000/£3600 each year from now on and thus may benefit from compound interest in the future.

Any advice much appreciated.

Thanks,

CLAPTON

basically if your debt's APR is more than your savings AER then use your savings to pay off debt.....so use the savings to pay off debt

save-a-lot

What you say is true CLAPTON, but in this case the money resides in an ISA and if this is benja101's long term savings then I would say keep the ISA as future interest will bridge the gap between the losses made whilst paying the loan off monthly. The other scenario is to pay it off using the ISA, but then that tax free allowance is lost forever on that portion of money.

If the intent is to keep the ISA long term, I reckon pay off the loan monthly.

CLAPTON

save-a-lot wrote: »

What you say is true CLAPTON, but in this case the money resides in an ISA and if this is benja101's long term savings then I would say keep the ISA as future interest will bridge the gap between the losses made whilst paying the loan off monthly. The other scenario is to pay it off using the ISA, but then that tax free allowance is lost forever on that portion of money.

If the intent is to keep the ISA long term, I reckon pay off the loan monthly.

whats the break even on this?

egamar

I have to agree with save-a-lot here, although my normal instinct is always to pay off debt first.

In this case, because once the ISA benefits are gone they're gone for good and the interest rate difference is relatively small, I'd pay off the loan from income, assuming I'm intending to keep the cash in the ISA long-term.

The break even depends on how long the OP keeps the £3k in the ISA, but even in the worst case making all calculations dead simple the extra cost of the loan is probably significantly less than 1.6% on £3k for 12 months (depends on whether loan interest is daily or yearly or whatever) or b*gger-all really in a case where the OP can afford to repay at £300/mo anyway.

save-a-lot

CLAPTON wrote: »

whats the break even on this?

I am sure there must be a calculator online to work this out. Depends on the OP's plan for money in the ISA. If it is long term then it is better off kept in the ISA.