Overpaying mortgage vs Cash ISA

leaseholdflat

My partner and I own a property on a low-LTV (<40%) interest-only mortgage with about 150k outstanding that I am keen to overpay and reduce as rapidly as we can. The interest rate on the mortgage is 1.37% fixed until mid 2021.

I would like to make over-payments every month to the mortgage (up to the 10% ERC free limit) but my partner is adamant that we should just park the funds in a Virgin cash ISA which pays 1.45%. My partner says there is absolutely no advantage whatsoever in overpaying the mortgage as opposed to letting in sit in a cash ISA which allows you access to the cash if needed.

I can see the logic but is there anything else that we need to consider or that my partner has missed taking into account? Both of us max out our £500 personal savings allowance but neither of us use any of the 20k ISA allowance.

Thanks in advance

Retired_Mortgage_Adviser

You make an overpayment on the mortgage, you save 1.37%pa in interest. You put that money into the cash ISA, you get 1.45%pa interest.

Given that (in most cases) money put into paying off a mortgage is difficult to access when/if needed, I would definitely opt for the cash ISA if faced with a choice as you describe above.

billy2shots

As your mortgage rate can be bettered with practically zero risk (bank going bust?) I would plonk it in there to save.

What you must not do is then be tempted to spend on unnecessary purchases because you have a lump sitting there. Who knows when your bank will lower its interest rates, you want to be able to act quickly if that happens.
2021 could also see mortgage rates rise, again that’s a chance to pay off a lump, plus no 10% limit when your fixed finishes.