Reduce mortgage repayments to pay into ISA? 15 December 2022 at 1:11PM in Savings & investments 9 replies 361 views

AdamC91

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?

jimjames

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.

dlevene

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/

Johnjdc

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!

penners324

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)

penners324

To reiterate, this is a dreadful idea because you'll pay 5% of your mortgage balance in Early Repayment Charges

AmityNeon

Two things to note:

• It is highly unlikely you'll want (or even be able) to switch to an interest-only mortgage, especially if you're currently in the middle of a fixed-rate term.
• Fixed-rate ISAs generally only allow deposits during an initial deposit window, after which the account is locked until maturity.

In your situation, I would avoid making mortgage overpayments, instead depositing your monthly surplus into a spread of high-interest easy-access accounts. This would mean Regular Savings accounts paying at least 4.5%, although the highest rates require you to hold the provider's corresponding current account (easy to apply for and you don't need to actually use them). If you still have surplus remaining, then you can choose a suitable unrestricted easy-access savings account.

After a year, when the regular savers mature, you can either make a large lump sum mortgage overpayment (if you have a 10% overpayment allowance and want to make use of it), or choose a fixed-rate savings account.

If you want specific recommendations at this point in time, if you've truly never had any form of savings account before, then:

• Open a current account with Virgin Money (M Plus is recommended for its interest and perks); this will provide access to their exclusive Cash ISA.
• Virgin Money Easy Access Cash ISA Exclusive (3%). This is a flexible ISA (so you can replace any money withdrawn without affecting your annual contributions), and also pays 3% AER, which is currently the highest rate for easy-access accounts.
• Principality Christmas 2023 Regular Saver Bond (5%) - £125 a month
• Halifax Regular Saver (4.5%) - £250 a month
• Other regular savers (paying at least 4.5%) require current accounts:
  • First Direct (7%) - £300 a month
  • Lloyds Bank (5.25% and 4.5%) - £400 and £250 a month
  • Barclays Rainy Day Saver (5.12%) - up to £5,000 (not a regular saver)
  • NatWest / RBS Digital Regular Saver (5.12%) - £150 a month
  • HSBC (5%) - £250 a month
  • Bank of Scotland (4.5%) - £250 a month

It's normal to hold multiple current accounts, and entirely possible to hold every single one of those regular savers.

Sg28

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. 

P1Fanatic

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.

george4064

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.