Take money out of ISA to put into Mortgage Offset Account?

michael5849

Hi MSE Forum

 

My wife and I have got £200,000 in a Cash ISA which we have saved over several years.

We have an open mortgage where we owe the lender £600,000. It's an offset mortgage. On that mortgage we pay 1.60% on the £600,000 minus whatever money we put into the mortgage offset account. For example, if we were to take out the £200,000 from our Cash ISA and put it into the mortgage offset account then we would pay the 1.60% on only £400,000.

I am struggling to decide whether to keep the money in the ISA to reduce the mortgage interest payments or keep it in the ISA instead. With a short term view, putting the money into the mortgage offset account is a good idea because in that account I effectly earn 1.60% (but not having to pay interest on £200,000, which is £3,200 each year). That 1.60% is much better than the less than 1% that Cash ISA accounts pay currently. Longer term, however, the problem is that once I've taken the money out of the ISA I can't put it back in. And who knows, maybe one day ISA rates will improve again.

 What would be your advice?

 Thanks!

kuratowski

One avenue that you may not have considered is that a cash ISA can be transferred to a S&S ISA.  It would take you 5 years as a couple to build up the same allowance in S&S ISA, so in some circumstances this could be very valuable, if you are likely to be in the position to invest this amount of money, and wanted to do so outside of a pension.  For example. a lot of people find S&S ISAs useful as a way to facilitate early retirement before the pension access age of 55 (57, legislation pending).

I don't have a crystal ball, but I can't see cash ISA rates being higher than mortgage rates in the foreseeable future.  So if you are determined to keep it as cash then maybe the mortgage offset account is better.

grumiofoundation

As above if you are looking long term investing all/some of the money would probably be a better option, whether via stocks and shares ISA and/or via a pension (and/or Stocks and shares lifetime ISA if eligble).

Alternative if you aren't willing to invest, which requires a bit of work, could be to transfer your money to a flexible cash ISA. This would allow you to withdraw it and pay it back within the same tax year without losing it's ISA status. You could then park it in the offset account for most of the year and transfer it back into the ISA before the end of the tax year to preserve it's status.

MX5huggy

Without going into every detail of your finances and all the options I would move the money to the mortgage. 

If you wanted it “back” you can easily hold £100k each outside an ISA without paying tax. £50k each in Premium bonds and your £1000 savings interest allowance being the obvious solutions. 

LHW99

grumiofoundation said:

Alternative if you aren't willing to invest, which requires a bit of work, could be to transfer your money to a flexible cash ISA. This would allow you to withdraw it and pay it back within the same tax year without losing it's ISA status. You could then park it in the offset account for most of the year and transfer it back into the ISA before the end of the tax year to preserve it's status.

Could the OP do that with the whole amount though? I had assumed that flexible ISA's dealt on a "current year" basis, so that One could only replace up to the current year's allowance if a withdrawal was made.

grumiofoundation

LHW99 said:

grumiofoundation said:

Alternative if you aren't willing to invest, which requires a bit of work, could be to transfer your money to a flexible cash ISA. This would allow you to withdraw it and pay it back within the same tax year without losing it's ISA status. You could then park it in the offset account for most of the year and transfer it back into the ISA before the end of the tax year to preserve it's status.

Could the OP do that with the whole amount though? I had assumed that flexible ISA's dealt on a "current year" basis, so that One could only replace up to the current year's allowance if a withdrawal was made.

Flexible ISAs allow you to withdraw previous years subscriptions and pay then back in without impacting current years allowance. I assumed you could do with any amount. Haven't seen anywhere that it is limited (whether by gov or providers) but I may be wrong? 

https://www.moneysavingexpert.com/savings/flexible-isas/

MaxiRobriguez

To answer the question directly, it makes perfect sense to move the money from your Cash ISA to your offset mortgage. You are in effect taking advantage of arbitrage. I too have an offset mortgage which is where some of my savings live - I have next to nothing in my bank account and I don't have a Cash ISA at all. 

To answer indirectly:
1) If it's long term savings then as others have suggested you may wish to consider a S+S ISA.
2) On top of that, if your pension savings aren't particularly high then you may want to consider pushing a large chunk of your salary into a pension to take advantage of tax avoidance, using the money in the Cash ISA as your living expenses if necessary to bridge the gap.
3) If you really don't want to go down the S+S/pension route, then you may want to consider a remortgage at the next opportunity to a non-offset product which comes with lower rates? You can get some mortgages at <1% now, albeit with a product fee, but the size of your mortgage makes the impact of that product fee very low. Going down this route allows you to keep the cash in an ISA wrapper if rates do rise in future.

steampowered

Keeping £200,000 in cash is madness. 

I read this morning that inflation has gone up to 2.5%, so your cash savings are actually losing value right now.

You should really, really, really consider learning the basics of investing. Move as much as possible into stocks & shares ISAs.

And consider topping up your pensions. The tax relief you would get on pension contributions could be worth literally decades of interest on the cash ISA or interest saved on the mortgage, not to mention that a typical pension returns something in the region of 6-7% per year on average.

Overpaying the mortgage could be better option than a cash ISA, but is nowhere near as good an option as a stocks & shares ISA or a pension.

Thrugelmir

What's an "open" mortgage?  How are you planning to repay the capital owed on the mortgage? 

Alexland

Unless your mortgage rate is fixed for life then even if Cash ISA rates improved you would expect to see your mortgage rate to eventually rise to maintain the lender's margin so there doesn't seem much point paying thousands each year to unnecessarily borrow this money.
£600k is a big mortgage, more than I would be comfortable with, although as others say there might be benefit investing the money via S&S ISAs and/or pensions where it could generate a higher long term return than cash rates.
With such generous ISA contribution allowances each tax year why else are you looking to preserve this allowance? Eg are you expecting a very large gift or inheritance that would otherwise take many tax years to ISA wrap?

solidpro

I vote transfer to S&S ISA. Maybe you'll make 4% or even 10% which is even better than losing money with 1.6% (against current rate of inflation)