Take out more mortgage so we can keep our ISAs?

jojo_1982

We are looking to purchase a property. We have 120k in ISAs that we were planning on using as part of the deposit. Would we be better to leave this in the ISAs and take out more mortgage?

We are both higher rate tax payers so it really helps not paying tax on the interest we get from this money. We would easily be able to borrow/afford the 120k extra.

ACG

You probably need to speak to an accountant rather than a mortgage broker. 

However, it might also be worth looking into offset mortgages. Your savings do not accrue any interest, but your savings mean you are not paying interest on that portion of the mortgage. 

born_again

jojo_1982 said:

We are looking to purchase a property. We have 120k in ISAs that we were planning on using as part of the deposit. Would we be better to leave this in the ISAs and take out more mortgage?

We are both higher rate tax payers so it really helps not paying tax on the interest we get from this money. We would easily be able to borrow/afford the 120k extra.

How much is the interest rate on the mortgage compared to ISA?

Will using some of the ISA balance bring down the interest rate with a smaller LTV?

jojo_1982

From first glances there's not a whole lot of difference between the rates we would get on a mortgage compared to ISAs, though I haven't actually got as far as applying for a mortgage yet and I'm just assuming we'd be eligible for some of the lower rates I've seen.
We would only need a ~30% mortgage anyway so I think we'd already benefit from the lowest rates with regards to LTV

jojo_1982

ACG said:

You probably need to speak to an accountant rather than a mortgage broker. 

However, it might also be worth looking into offset mortgages. Your savings do not accrue any interest, but your savings mean you are not paying interest on that portion of the mortgage. 

Can you offset ISAs? I'm just thinking about in the future when we've paid the mortgage off and then would be saving way more than we could contribute yearly to an ISA and ending up paying a lot extra in tax

ACG

jojo_1982 said:

ACG said:

You probably need to speak to an accountant rather than a mortgage broker. 

However, it might also be worth looking into offset mortgages. Your savings do not accrue any interest, but your savings mean you are not paying interest on that portion of the mortgage. 

Can you offset ISAs? I'm just thinking about in the future when we've paid the mortgage off and then would be saving way more than we could contribute yearly to an ISA and ending up paying a lot extra in tax

Your not offsetting the savings, you are offsetting the mortgage.

£200k mortgage is say 4%. 
£50k savings you might get 4%. 

An offset mortgage...
£200k offset mortgage is say 4.2% (they are a little more expensive). 
£50k savings you would get 0%. 
No interest on the savings = no tax on savings interest. 
But you would only be paying 4.2% on a £150k mortgage as the £50k would be used against artificially lowering the mortgage. 

housebuyer143

If your rate for the mortgage is the same roughly as the savings then I would keep using the ISAs. I have the full balance of my mortgage in the bank and prefer to keep it rather than pay off the mortgage. They offset each other with the rates so it's not really costing me much to do this but I have the cash if I need it.

jojo_1982

ACG said:

jojo_1982 said:

ACG said:

You probably need to speak to an accountant rather than a mortgage broker. 

However, it might also be worth looking into offset mortgages. Your savings do not accrue any interest, but your savings mean you are not paying interest on that portion of the mortgage. 

Can you offset ISAs? I'm just thinking about in the future when we've paid the mortgage off and then would be saving way more than we could contribute yearly to an ISA and ending up paying a lot extra in tax

Your not offsetting the savings, you are offsetting the mortgage.

£200k mortgage is say 4%. 
£50k savings you might get 4%. 

An offset mortgage...
£200k offset mortgage is say 4.2% (they are a little more expensive). 
£50k savings you would get 0%. 
No interest on the savings = no tax on savings interest. 
But you would only be paying 4.2% on a £150k mortgage as the £50k would be used against artificially lowering the mortgage. 

Apologies - I meant can the savings in ISAs offset the mortgage like normal savings would? I didn't know if they're excluded for any reason (like because they provide interest tax free). Though I'm not sure if it would be a bit difficult trying to move that amount of ISAs around between providers

MWT

I have no idea if this is still possible, or advisable, but I do recall some time ago that people were using an offset mortgage with the feature of a flexible ISA which permits money to be moved out of the ISA and returned to the same ISA without using any of the current year allowance as long as the movements were within the same tax year.

Thus they could take the funds out of the flexible ISA on the first day of the tax year and put it into an offset account. Then on the last day of the tax year they could return the money to the ISA, and repeat a day later in the new tax year...

Net effect they only paid interest on the balance offset by the cash from the ISA a couple of days at most each year and the rest of the time had the mortgage was substantially or even completely offset.

Something to take advice on if it sounds viable...

The risk obviously is the lack of growth of the funds in the ISA vs the interest saved on the mortgage.

saajan_12

jojo_1982 said:

We are looking to purchase a property. We have 120k in ISAs that we were planning on using as part of the deposit. Would we be better to leave this in the ISAs and take out more mortgage?

We are both higher rate tax payers so it really helps not paying tax on the interest we get from this money. We would easily be able to borrow/afford the 120k extra.

Well you're not paying tax on the interest either way (assuming its your residential mortgage not a BTL). In an ISA, there's no tax, and the interest cost of your home has not tax relief. 

In terms of interest rates, if you can get a fix for the mortgage that's less than the ISA, then you're better off by keeping the money in an ISA, but you're taking the risk that if rates fall, your mortgage is fixed but your ISA will earn less. 

The main question is after taking out the mortgage, do you expect to have excess cash from income, which you'd want to either replenish the ISAs or overpay the mortgage? 
 *  If yes, then which one has the higher allowance to do that - ISA limited by 20k, mortgage limited usually by 10% but check. 
 *  If no, then it makes little difference.. after your fix runs out, you could make the same assessment based on interest rates and decide whether to use the ISA money to pay a chunk of the mortgage off. 

jojo_1982

jojo_1982 said:

We are looking to purchase a property. We have 120k in ISAs that we were planning on using as part of the deposit. Would we be better to leave this in the ISAs and take out more mortgage?

We are both higher rate tax payers so it really helps not paying tax on the interest we get from this money. We would easily be able to borrow/afford the 120k extra.

Well you're not paying tax on the interest either way (assuming its your residential mortgage not a BTL). In an ISA, there's no tax, and the interest cost of your home has not tax relief. 

In terms of interest rates, if you can get a fix for the mortgage that's less than the ISA, then you're better off by keeping the money in an ISA, but you're taking the risk that if rates fall, your mortgage is fixed but your ISA will earn less. 

The main question is after taking out the mortgage, do you expect to have excess cash from income, which you'd want to either replenish the ISAs or overpay the mortgage? 
 *  If yes, then which one has the higher allowance to do that - ISA limited by 20k, mortgage limited usually by 10% but check. 
 *  If no, then it makes little difference.. after your fix runs out, you could make the same assessment based on interest rates and decide whether to use the ISA money to pay a chunk of the mortgage off. 

I think I possibly didn't explain it that well, sorry. At the moment we're paying quite a chunk of tax on interest on our other savings, so it's nice having a chunk in ISAs. If we cash them in so we have a much smaller mortgage, we'd just pay it off more quickly and of course then we'd be able to save a lot more after as we wouldn't have the mortgage to pay. However we wouldn't be able to save that in ISAs (as they would already be maxed out each year) so might be worse off?
We should have enough cash from income to fill ISAs even while paying the mortgage, and I saw Martin explaining that the limit might be reduced which would mean we'd then only be able to save a tiny amount tax free. 
Most mortgages I've looked at would only allow 10% overpayment per year. That would be roughly 18k.