Should we clear out our ISAs?

jetfighter

When we re-mortgaged recently, our mortgage balance was £46,800. Our interest rate is 6.78%. We have 21 years left on the mortgage.

We've made a lump sum overpayment of £15,200, reducing our mortgage to £31,600 - temporarily. The £15,200 was additional borrowing to fund a loft conversion. Our mortgage deal allows us to overpay as much as we like without penalty, and also withdraw any overpayments, so we've re-paid the £15,200 (to avoid interest charges) until we need it. We plan to take it out again when we're ready to pay the builders.

Now, we have about £11,000 spread between our cash mini ISAs at an interest rate of 5.50%. Obviously there is something amiss here, and we should probably look at getting better ISAs, but my question is: should we consider using the £11,000 from our ISAs to (partially) fund the conversion, only withdrawing a few thousand from our mortgage, or shall we instead move the ISAs to a different bank with a higher than 6.78% interest rate and use the money from the mortgage instead? (Or, alternatively, should we keep the money in the same ISAs and still withdraw the money from the mortgage?)

I guess it's a no-brainer than switching to a better ISA would be a good plan, but I don't know whether we should spend our ISA money or borrow back from the mortgage - the idea of losing our £11k safety net is a bit nerve-wracking!

I'm not sure what to do for the best really. I am a complete mortgage-free wannabe but I don't see it happening any time soon!

MoneySavingNovice

Hi JetFighter

You pose an interesting question, one which I am also struggling with.

In Simple Maths it works out that the cost of the 11k mortgage is £746 p.a. and the income you receive from your ISA is £605 p.a. this means that what this is actually costing you is £141 p.a.

I would consider that this to be the cost for liquidity, i.e. the cost you are baring to have quick access for your money.

In my opinion you have a couple of options:-

1) as you suggest find a better ISA account. The one Martin recommends at the moment (for transfers in) is Kent Reliance Building Society's Direct ISA paying 6.21%. Thus in simple maths the income you would receive is £683 p.a. thus the cost for liquidity is £63 p.a.

2) Reduce your mortgage with your ISA account, but there are a couple of things to take into account,
a) You can only invest £3,000 p.a. into an ISA, once you take it out you lose your allowance for that year (i.e. you can't put it back) and thus lose your tax savings advantage on that amount forever.
b) You lose access to your current 'emergency money pot'. I question if your actually need this. You say that you have a flexible mortgage were you can ask for your repayments back quickly if needed, so if the worst comes to the worst and you need your emergency money, you have a line of credit (i.e. you can get money quickly) and thus should not need too much of a 'emergency money pot'

3) You don't say if you have any other debts. If you do you might wish to consider paying off any other higher cost debts first (taking into account any repayment charges).

4) You also don't indicate if you have any other savings/investments. If you are a Tax Payer (especially a higher rate tax payer) taking a strategy of using other investments which are not making a return which covers your mortgage costs is an option. This will give you (most likely) a tax saving.

I am interested to see what others think as well. I don't believe that there is a 'right' answer to your question, only different options. In my case I have decided to keep my mortgage down to the minimum, but because I don't have the flexibility to get repayments back, I keep £5,000 in a ISA - in my case I also need to find a better paying one.

Good Luck!

jetfighter

Thanks MoneySavingNovice.

Like you I too am a novice, as you can probably tell from my daft questions :rolleyes: but I am trying to learn!

We probably don't need the £11k emergency money pot - maybe we just think we do, though we haven't dipped into it yet this tax year. £5k of that was supposed to be for other renovations, though these can't be done until after the loft conversion anyway - so technically, we could've put that back into the mortgage instead until we need it.

We have no other debts and no other savings/investments. We're both basic rate taxpayers.

My only other concern is that our mortgage is with Northern Rock, and getting your money back out of it depends on their "prior agreement" - though I'm assured we'd be able to get it. As it's technically their money (not our savings) I'm sure they'd be within their rights to refuse it if they didn't want to give the money back... but I'm assured this isn't the case. Hmmm.

I appreciate your reply. Thank you!

Jonbvn

TBH, using cash-ISA's to pay off your mortgage is a bit of a grey area. I think MSN has highlighted to pros and cons well. After that it really is down to your exact circumstances, and what you are happy with.

Personally, I like to put money into ISA's and consider it as untouchable, except in the direst of emergencies.

jetfighter

Thanks Johnbvn.

Like you I'm a bit uncomfortable with the idea of withdrawing money from our ISAs, simply because of its tax-free status. I get the feeling we won't be going for that option...

So I'm now in the process of signing us both up for an YBS e-ISA at 6.05% (transferring out) as we're currently with smile and that's only 5.50%. We should really be going with Kent Reliance for maximum interest but I can't be doing with post-only account operation! Too much of a nethead!

I'm also signing us up for Martin's top instant access savings account at 6.41% (ICICI's HiSave) as we often have money floating about which can't go into long-term savings (e.g. ISAs) as we'll need it within the next month or so, but at the moment that money is stuck in our 5.00% smile savings account.

Nine months ago I thought it'd be best to have all of our banking accounts with one bank. Hmmm. :rolleyes: It'll take some time to get used to not being able to transfer money instantly between our smile accounts, but hopefully we'll get used to it and enjoy the rewards as well.

Not quite ready to switch from smile completely just yet, so we'll be keeping the current account... for now at least!

Once we've finished with our renovations, especially the loft conversion and bathroom, it'll be so much easier to concentrate on getting that mortgage paid off! At the moment I feel as though we have to keep all of these little "instant access" pots of money everywhere, rather than sticking it all in the mortgage.

Hereward

You are better off keeping the money in you cash ISAs as the interest it accrues in tax-free and once you remove it you can't put it back. If ISAs still exist in 21 years time, you will be glad that you kept the money there as it will have grown quite well. I believe that the general advice on this board is to pay into your ISA first, before considering reducing your mortgage, but I will be happy to be corrected.

MoneySavingNovice

Thanks for your kind words, hope I have been of some help.

Strikes me that you have got a sound strategy worked out.

The only other thought that I had , given your upcoming spending, was if it would be worth you while getting a 0% Interest Credit Card on Purchases for 12 months. The Halifax or HSBC offer 12 months interest free.

What I am doing at the moment is making all my spending on this card, paying on the minimum at the end of the month, and putting a corresponding amount into a savings account on which I earn interest. At the end of the 12 months I will pay off the card in full, before interest becomes due, and pocket the interest earned in the saving account. It depends on your spend of course, but for me I am 'making' an extra £100 for no effort!

(Sorry for being off subject)

Good luck with you building project.

jetfighter

Fab advice everyone, thanks! :T

It's great to get some opinions from people who are probably a bit more experienced than I am. :rolleyes: I've decided to scrap the idea of going for the YBS ISAs and instead we're going for the Kent Reliance ones - we're hardly going to look at them anyway, and making them as inaccessible as possible will mean we don't think about the money. :rotfl:

I'm also going to look into changing our current account and credit cards. I want to be a proper money-saving expert. MoneySavingNovice, most of our spending will be via cheques so not sure major spending on a 0% credit card will be useful - unless you can get credit card accounts with cheque books, that is! :rolleyes: There's plenty to think about, isn't there? Trouble with me is that I want to do it all NOW! Probably best to just make one or two changes at a time.

Thanks everyone!

Kaz2904

jetfighter, are you tied into your mortgage? The reason I ask is because I think you ought to have a look at a mortgage that allows you to offset your ISA's.
I ask because you may pay a slightly higher interest rate on borrowed money but you would not pay interest on the amount in your ISA- nor would you earn interest.
You might find it works out cheaper for you- you may not.
Please check out one of the mortgage calculators before you make your final decision.

MoneySavingNovice

......most of our spending will be via cheques so not sure major spending on a 0% credit card will be useful - unless you can get credit card accounts with cheque books, that is!

Sorry didn't think of the spending for building works with cheque's (obvious now you point it out). Most of the credit card companies provide chequ'es, but I would not recommend using them as they start to charge interest normally at a big rate from day one.

jetfighter

Kaz, yes, we are tied into our mortgage deal for another 18 months or so. I don't know much about mortgages that offset an ISA - interesting idea - I'll have to read up on that, but don't think we'll be switching until our two-year fixed rate period is up. London & Country found us our current mortgage deal but the interest rate is a bit higher than other deals available at the time simply because we asked for certain "flexible features". Next time we remortgage we won't need the borrow-back feature so maybe a less complicated mortgage deal will be the ticket in 2009.

I've got us all signed up for ISA transfers to Kent Reliance, then we'll subscribe to the top ISA for 2008/2009 after that. I'm determined to wangle as much interest as possible out of these savings if we're not putting them into the mortage!