Mortgage Dilema

paul25

Hello,

I have a mortgage currently at £163,500, my fixed rate of 5.24% ends February 2009. I am making overpayments of £500 per month and hope for the mortgage to be appx £158,000 come Februaury.

Heres the dilema ;

In February I hope to have appx £25,000 in savings with Isa's (£22,000) and premium bonds (£3,000). I don't know whether to use my savings to pay a chunk of my mortgage off or to keep the Isa savings earning a reasonable interest rate. Or maybe going for an off-set mortgage would be better option for me.

Please help with any views.

Thanks
Paul.

Optimistic_Saver

Hi Paul25 - I know what you mean. It's difficult to know what to do isn't it, whether to hang on to your savings or pay a chunk off your mortgage?

I am in the same boat, i.e. have a mortgage of approx £143k. Shortening the mortgage term from 23 years to 9 years has had the effect of paying £500 amount extra off the mortgage each month. Like you, I have some savings stashed away (around £20k). It is earning a reasonable rate of interest in an NS&I 5-year high interest account but suspect it would work harder for me if I were to use it to pay a chunk off my mortgage.

Hopefully you will get some financial interest comparison info/advice from others which will help you decide what to do. But for me, I think it as much the psychological comfort of knowing I have access to rainy day cash should I need it as anything else. I am self employed and like the security of knowing I have access to my savings safety net if that rainy day ever comes and I need to pay a big bill.

I don't intend to keep more than £20k in savings. Anything over and above this will go into paying off the mortgage. But it gives me peace of mind knowing the money is there should I need it.

Good luck with whatever you decide to do!

h4nym

Hiya

Yes there's some satisfaction in counting your money, and it's fun seeing 25,000 in savings available to spend as you want... but there's nothing better than seeing your mortgage disappear.

Remortgage onto an offset or Current Account mortgage and pay every single penny you have into it. Unless you're earning ridiculous and guaranteed rates on your ISA and are exceptionally lucky on your premium bonds, just work out how much more fun it will be when the 500 you're overpaying at the moment becomes 750 because your interest is lower, and then a few of those overpayments allow you to ramp it up to 1000.

H

nrsql

Most offset mortgages don't give a good rate and you would be better off with a discount which usually allows 10% per annum overpayments.
Exception might be the first direct (5 year @ 5.39% but with £800 fees). You are probably making more than that on isa's so best to keep those too.
It's good to keep isa's if possible as you can't put them back once withdrawn.

Do the sums and compare rates - remember to take into account interest earned on money not paying off the mortgage and the penalty free payments you are allowed to make. That's where offsets often erroneously appear to be beneficial.

Jonbvn

Some issues you should consider:

1. Future mortgage rate vs. future ISA rate - lots of fixed rate ISA's around ATM worth considering.
2. Fees for remortgaging. Due to the credit crunch fees have sky-rocketed. They must be considered when you make your decision.
3. The Plan B situation: Consider what things could go wrong, and how much money you may need to put them right. E.g. Heating boilers, cars, redundancy etc.
4. Retirement planning. ISA's are a good way of saving for retirement.

Kaz2904

I would keep the ISA money in ISAs to be honest as you will take a long time to fill them up again and once it's gone it's lost. You'll never have that amount tax free again.
It may be worth offsetting but you might be able to get a mortgage rate that is low and fixed and I would suspect that you could beat it with a fixed rate ISA should you pick wisely.
You then save yourself the hassle of gradually trading your ISAs out of the offset into better accounts.
The fees will probably be what swings it though.

bandraoi

The ISAs sound like they're earning you more than your mortgage is costing you, so I'd keep filling them up. If mortgage interest rates jump up, then you have the option of paying them off the mortgage.

Dithering_Dad

Intelligent Finance have a mortgage product that allows you to offset your ISAs (I think there are also some other providers who do this)) and so you could keep your money in the ISA wrapper but also benefit from the mortgage offsetting, allowing more of your monthly mortgage payments to pay off the capital of the mortgage rather than the interest.

bandraoi

Dithering_Dad wrote: »

Intelligent Finance have a mortgage product that allows you to offset your ISAs (I think there are also some other providers who do this)) and so you could keep your money in the ISA wrapper but also benefit from the mortgage offsetting, allowing more of your monthly mortgage payments to pay off the capital of the mortgage rather than the interest.

Surely you're better off in the long term with the interest ending up inside the ISA wrapper though?

It's like making an extra lodgement of £150 a year to all your old ISAs every year (at 5% on £3000)

Dithering_Dad

bandraoi wrote: »

Surely you're better off in the long term with the interest ending up inside the ISA wrapper though?

It's like making an extra lodgement of £150 a year to all your old ISAs every year (at 5% on £3000)

Sorry, I'm a bit confused with your question, so apologies in advance if I have missinterpreted. I think you're saying that if your ISAs are offset against a mortgage rather than just in the 'free market', you could lose out on interest.

This could be true, but the difference in the rates between mortgages and Cash ISAs are so small that it doesn't really make much difference. Especially if you factor in the costs of arranging a mortgage (typically £1000 for a 3 year deal) - suddenly that 5% mortgage rate, fixed for 3 years with an arrangement fee of £1000 is really giving you an APR of 6% - not much lower than the ISA rates.

With offsetting the ISA savings against the mortgage it could mean that you lose a few quid a year in interest, but gain because not only are you able to pay off your mortgage much quicker (saving thousands of pounds in mortgage interest) but you also keep the ISAs once the mortgage ihas gone - a win-win situation if I ever saw one!!

p.s. plus this solution is not an 'all or nothing' approach that it would be if you simply cashed in your ISAs and put them onto the mortgage. As Kaz has said - once you've cashed them in you've lost their tax free status forever. If you offset and then a couple of years down the line manage to remortgage at a really good rate (i.e. because you have improved your LTV due to overpayments), then you could simply move the ISAs out of the offset account to a provider offering the best rate.

bandraoi

What I'm getting at is that

Interest paid out on ISA = Interest cost on Mortgage
because there is a negligible difference in rates.

If you offset one against the other, than no interest is paid on either the mortgage of the ISA, so while you pay less interest, you earn less interest.

If you don't offset you appear to pay more, but you earn exactly the same amount back, so you end up with the same total net worth EXCEPT that by paying interest off on the mortgage and allowing interest to accrue within the ISA, you've essentially moved more money into the Tax free ISA wrapper by paying interest on your mortgage.

Once your mortgage is paid, the money is still sitting in the ISA ready to earn interest.

There is no benefit to offsetting if your savings accrue interest at the same rate as your debt.