Reduce mortgage repayments to pay into ISA?

I’ve been quite lucky in that I secured a 5 year fixed rate mortgage at 1.34% in November 2021 with Santander. I’m currently paying this off as quickly as I can and just have some rainy day money in my current account earning 1.75% (on balances up to £20k) and no savings account or other investments.

I’m wondering if this is completely the wrong approach, and rather than paying the mortgage off I should be saving, and using the savings to repay a chunk off the mortgage at the end of its term. 

Currently thinking I switch to interest only mortgage and instead make monthly payments into a fixed rate 3 year ISA at a higher rate (wouldn’t need to access it as it would otherwise have gone to pay off the mortgage).

I’ve never had any form of savings account so don’t know if that’s possible, if there are any downsides to this, or if the rate I’ll be able to get means it’s worth the hassle?

Replies

  • edited 16 December 2022 at 10:46AM
    jimjamesjimjames Forumite
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    edited 16 December 2022 at 10:46AM
    Yes it's certainly possible and sounds like a no brainer. Santander were offering a 2.75% savings account and Virgin offer a 3% ISA so it makes zero sense to pay off mortgage at 1.34% when you can get so much more on your savings instead.

    EDIT - missed the bit about Interest Only - my comment above refers to overpayments not interest only, that certainly isn't a no brainer.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • edited 15 December 2022 at 1:31PM
    dlevenedlevene Forumite
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    edited 15 December 2022 at 1:31PM
    It takes quite a bit to make savings worth more than overpaying simply because of how large the mortgage debt is. MSE have a calculator that will answer this question for you 

    https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

  • JohnjdcJohnjdc Forumite
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    Yep unless you're a higher rate taxpayer who is already using all their ISA allowance, this almost certainly has to be worth it in the current circumstances!
  • penners324penners324 Forumite
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    I assume you'll be doing this in 2026?

    It's not possible to switch to an interest only mortgage when on a fixed rate (actually it is possible but will cost you £000s in charges)
  • penners324penners324 Forumite
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    To reiterate, this is a dreadful idea because you'll pay 5% of your mortgage balance in Early Repayment Charges
  • Sg28Sg28 Forumite
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    So good advice above. 

    I do this already I have cancelled my overpayments. Instead the money goes into savings accounts. Then in my case im lucky enough that once my fixed deal ends may savings will be more than enough to pay the whole balance off. So effectively Im currently earning earning interest on my mortgage debt. 
    Ex Sg27 (long forgotten log in details)

    Massive thank you to those on the long since defunct Matched Betting board. You started me on the path to making more money than I ever thought possible! 
  • P1FanaticP1Fanatic Forumite
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    As others have mentioned - the chances of you being able to switch to interest only without incurring a large charge are pretty slim. Switching from overpayments to regular saving should be easy enough to calculate the difference in interest saved vs interest earned over the same period. Another advantage of the saving method is you have additional savings should you have an emergency between now and the end of the term.
  • edited 15 December 2022 at 11:35PM
    george4064george4064 Forumite
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    edited 15 December 2022 at 11:35PM
    Don’t switch to interest only, just stop making overpayments and instead move that money into high interest savings account (must earn a higher rate than the interest rate on your mortgage). 

    When it’s time to re-fix you can make a lump sum payment then to reduce your LTV and potentially get access to better rates, or just leave them in saving account(s) earning higher interest and make lump sum payments whenever is a suitable time for you.
    "If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” Warren Buffett

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