ISA or Offset mortgage

YorkshireBuzz

Hi new here and wanting some advice. Ive got an offset mortgage with just under 50k left to pay off, ive got 20k in the offset account, i have money put in a couple of years worth of isa's which amounts to just over 20k in total. I have been over paying the mortgage off and then using the interest from the isa's to also pay this off on a yearly basis, the interest rate i was getting on the isa's was more than i was paying on the mortgage interest so i was better off. My question is, now isa rates have dropped the mortgage interest is now higher than the isa, so should i transfer the isa money to the offset account then only pay interest on a small amount of the mortgage or leave it in the isa's for long term?  

Mark_d

Transferring money to the offset account is broadly equivalent to making an overpayment on your mortgage. As you say, it's a good idea to do this if the money you'd make elsewhere is more than the mortgage interest.

Personally I choose a standard interest-only mortgage rather than offset mortgage because I think the interest rates are generally better.  This summer I took out a 2 year fix at 3.61% (20 year term).  Rather than repaying the mortgage I believe that over the 20 year term, the average rate of return on my S&S ISA will exceed the interest rates I pay on the mortgage.

If you have a long time left on your mortgage, like me, then I think there are better options than using the offset account.  However if you have less than 5 years on your term then maybe the offset account is your best option

YorkshireBuzz

Thanks Mark, I have 3 and a half years left on my current deal. The rate I could get at the time on the offset mortgage, was the same rate or better in most cases than what I could get on a fixed rate mortgage. I'm trying to get the mortgage payed off in the time left on the current deal, or maybe a couple of extra years after that if I can.

vacheron

If you just want to pay off the mortgage as soon as possible (as many people do) I would be taking the ISA money out and offsetting the mortgage. You say that you are planning to attack the mortgage over the next few years, so I would assume that every spare penny would be going into the offset, so you should be able to build up any subsequent savings into ISAs again after the mortgage complete.

There is another possible option though: I have a Barclays offset mortgage which allows you to offset ISAs against the mortgage.

If your offset is Barclays, or your offset provider also permits this, it means that not only could you transfer your current ISA to and retain the ISA status while recieving the offset benefit at your mortgage rate, you could also transfer your current 20K of offset savings into ISAs while inside the mortgage using your unused ISA allowances each tax year. This would result in you ending up with all your offest cash held in ISAs which you can transfer out once the mortgage is fully offset. 👍

As Mark_d says, if your offset rate is low, there is the option to get better returns in the stock market over the long term, but this still carries risk. In my case my offset has a rate of 7.25%, but as it is fully offset this doesn't matter, there is also no "safe" investment offering a better rate, so I am comfortable keeping this money ringfenced and knowing that I am not taking any risks with the roof over my head. I have plenty of other risky investments doing that already.

YorkshireBuzz

Thanks for that Vacheron, I never new about that situation with Barclays, unfortunately I'm not with them for my mortgage, but will look into this if my provider offers this option 👍

saajan_12

Assuming you're choosing between cash savings and an offset mortgage:
Then it depends on if you're likely to hit the ISA limit in the next few years. Eg if you're likely to have new money to contribute to an ISA using up the 20k limit, then it'll be harder to replenish this money if you extract it. 
If not then just pick the highest rate - whether that's the offset mortgage, or ISA account, or a normal high yield savings account x 0.8 or x 0.6 depending on your tax rate.