Mortgage Dilema

Dithering_Dad

bandraoi wrote: »

...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.

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

By the same token, there is no benefit to having your ISAs separate from your mortgage.

It's all about what motivates you financially. If you like seeing savings grow and don't think of your mortgage as a debt, then you'll probably be posting in the Savings and investment boards, if you see your mortgage as a debt that you'd rather be without, then you're more likley to post in the MFW board.

As the OP posted in MFW, I assumed he is keen to get rid of his mortgage ASAP and so I suggested that offsetting his mortgage would perhaps give him the pleasure of seeing his mortgage decrease but without having to lose his ISAs.

No offense, but I have to say that I'm finding it rather dreary to keep discussing the minutae of finances and whether one approach is better than another, especially as you've pointed out, there can be little difference between savings and mortgage interest (we're literally only talking pennies). More important, as far as I am concerned, is what motivates you as an individual to make a few small sacrificies for your financial well-being.

If you're an individual who will be more motivated by savings, great stuff - keep it up! If you're motivated to clear the mortgage, then "welcome to MFW, good luck with your goals!!".

bandraoi

By the same token, there is no benefit to having your ISAs separate from your mortgage

There is with ISAs as the interest earned is tax free, and continues to earn interest tax free, and once either the capital or the interest is taken out of the tax free wrapper it can't go back in.

For other types of savings accounts there's no benefit and I would 100% agree with you that the satisfaction is worth it, but with ISAs being long term and tax free, I have to disagree.

Once the OP gets to the point of having the mortgage paid off and the savings reinstated, which they will either way. They're better to have £30,000 in tax free ISAs then £30,000 in a conventional savings account.

Dithering_Dad

bandraoi wrote: »

There is with ISAs as the interest earned is tax free, and continues to earn interest tax free, and once either the capital or the interest is taken out of the tax free wrapper it can't go back in.

For other types of savings accounts there's no benefit and I would 100% agree with you that the satisfaction is worth it, but with ISAs being long term and tax free, I have to disagree.

Once the OP gets to the point of having the mortgage paid off and the savings reinstated, which they will either way. They're better to have £30,000 in tax free ISAs then £30,000 in a conventional savings account.

The interest saved on a mortgage is just as free of tax as the interest gained in an ISA. However, I'm confused as to your point with this post because I advised the OP to keep the money in his ISA and to offset the ISA not to pay off the mortgage with the ISA money or to move the ISA money to a savings account.

JimmyTheWig

paul25 wrote: »

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.

Assuming you are earning a decent rate with your cash ISAs (i.e. around 6%) then at the moment the best thing to do is to keep the money in your ISAs as you are earning more than you would save.

Premium bonds offer a poor return so you would be better off using that to take 3k off your mortgage. Unless the thrill of having them is worth it for you.

The only real benefit to an offset mortgage is that you don't pay tax on the "interest" on your savings. But your savings are in ISAs and so you aren't paying tax on them anyway. So I would say no to an offset.

There may be a benefit to using your ISA money to reduce your mortgage in February if
(a) with the better LTV (i.e. bigger deposit) you can get a better deal
or
(b) the "credit crunch" means your mortgage interest will be more than the (say) 6% you are getting on your ISAs.

If your motivation is to be mortgage free, then as soon as your ISA savings reach your outstanding mortgage debt then pay off the mortgage in one foul swoop (subject to redemption penalties, etc).

bandraoi

If he uses the money in an offset ISA, then he will not earn interest within the ISA tax free wrapper.

After say 5 years at 5%, instead of having an ISA with £25,525 in it, his ISA will still have £20,000. On an equal payment basis, he will have saved that £5,525 in interest, but that won't be inside an ISA.

That £5,525 at 5% inside an ISA will earn him more than in a top savings account outside an ISA by £30 or £40 a year and more with each passing year.
http://www.moneysavingexpert.com/savings/best-cash-isa

The differences aren't mere pennies.

Dithering_Dad

bandraoi wrote: »

If he uses the money in an offset ISA, then he will not earn interest within the ISA tax free wrapper.

After say 5 years at 5%, instead of having an ISA with £25,525 in it, his ISA will still have £20,000. On an equal payment basis, he will have saved that £5,525 in interest, but that won't be inside an ISA.

That £5,525 at 5% inside an ISA will earn him more than in a top savings account outside an ISA by £30 or £40 a year and more with each passing year.
http://www.moneysavingexpert.com/savings/best-cash-isa

The differences aren't mere pennies.

Jeeze, here we go with the minutae again :rolleyes:.

That £5,525 at 5% inside a MORTGAGE will save him the same amount in interest as it would make him in interest if he saved it in a 5% ISA. The only time he will be impacted is when he pays off his mortgage and can no longer offset the money tax free - but as he has now paid off his mortgage and has achieved his stated ambition, I doubt he will be too worried!

As I tried to say before but was ignored. The OP posted in the MFW board so I assume it's because he wanted to pay off his mortgage quickly. Had he been asking a question "I want to save in an ISA for the rest of my life and not take a penny out of it, so that I can fund my retirement, is this a good idea?", then he would obviously get a different response and would also be posting in the retirement board.

As I also mentioned before, we all have different motivations. The OP obviously had a motivation to save up a great deal of money in ISAs, and he did a great job of it. He now wants to look at reducing his mortgage. My option gives him the opportinuty to offset his ISAs to reduce his mortgage and to see if he get more of a buzz from that than from ISA savings. If he does, then he has the option to either keep the ISA offset or to cash in the ISAs and pay down his mortgage. If he doesn't then he can move his ISAs back to his original provider without any real penalty.

Why you keep going on about money in an ISA getting better rates than money in a traditional savings account is beyond me - at no time have I mentioned putting money into a savings account!

bandraoi

If you're bored by this then don't post, no one is making you.

My figures are correct. The OP is better off to keep the money in an ISA then to take it out and put it against his mortgage, or to offset it against his mortgage.

That is the answer to the question he asked.

People can be mentally mortgage free by drawing up their own spreadsheet showing they owe no money, and printing out a statement, just as easily as by having the bank send one out to them.

Dithering_Dad

bandraoi wrote: »

My figures are correct. The OP is better off to keep the money in an ISA then to take it out and put it against his mortgage, or to offset it against his mortgage.

You can't possibly know enough about the OP to make such a statement. What if he has a high LTV and due to the credit crunch he will not be able to get a good deal when he remortgages and ends up with a SVR at 7%.

Or perhaps (like me), the OP got his mortgage when he was an employee for a huge company and so got a favourable mortgage deal but has since started up his own company and so to secure a new deal has to "self-Certify" and therefore pay a much higher mortgage rate (even though he actually earns sheds more money).

If it was so cut and dried that:

1) Cash ISAs will ALWAYS have an interest rate so much higher than your mortgage rate that it does not make financial sense to overpay your mortgage.

2) S&S ISAs will ALWAYS have a return higher than a Cash ISA, so it does not make financial sense to waste your ISA allowance on cash.

3) High risk investments will ALWAYS give you better returns than low risk investments, so it does not make financial sense to waste your ISA allowance on low risk investments.

Then there wouldn't be any need for half of the MSE boards. We would all simply put our money into high-risk S&S Isas and that would be that.

However, everyone is different and everyone's circumstances are different, so to someone posting in the MORTGAGE FREE WANNABE board, I will always say that if paying down your mortgage would motivate you to make even more savings then good luck to you.

As a final observation, that may help you understand where I am coming from...

I have a friend who loves Premium Bonds. He has about 25K in them. I mentioned to him that generally they're slated because the winnings/returns are less than if he had put his money into a high-rate account. He responded by saying that the thrill of winning on his premium bonds gave him the incentive to save the 25k. Without the thrill, he wouldn't be motivated to save. So worrying missing out on a few hundred quid in interest is a moot point because he wouldn't have the 25k in the first place....

JimmyTheWig

Ok, can we reach some sort of consensus, here, please?

There is no point this going backwards and forwards, at least until the OP returns to give his point of view.

What do we agree on?...

1. Losing the ISA status of the savings he has would generally be a bad thing.

2. From a purely financial stand point, with todays figures, he is better off keeping his savings earning interest in an ISA than using them to reduce his mortgage interest.

3. From a purely financial stand point, most things are better than premium bonds.

4. However, if the OP has an "emotional attachment" to one type of saving or another then this may outweigh the financial stand points above. E.g. if he chooses his favoured route which encourages further saving (by, say, cutting down on a take-away a week) then this is something only he can decide.

5. The true best course of action can't be seen until the OP starts looking at new mortgage deals.


All agree?

Dithering_Dad

JimmyTheWig wrote: »

Ok, can we reach some sort of consensus, here, please?

Sorry, negotiations between the pro-MFW and anti-MFW factions are impossible. You might as well try and solve the Israeli/Palestinian problem. There cannot be a consensus because it really depends on the OP's circumstances. For example...

1) Unless you intend using your ISAs as a vehicle for retirement and so will never cash these in, but instead use the interest generated from age 60 onward as an income, then you're probably going to cash in your ISAs at some point so if your mortgage rate is more than the ISA, get em cashed in soooner rather than later, cos you're losing money.

2) While the OPs stated mortgage rate is 5.24 fixed, we don't know how much he paid in mortgage arrangement fees for this mortgage and whether he had to pay a redemption fee with his previous mortgage provider. He could have paid £1500 in fees for a 3 years fixed mortgage and £500 redemption fee - therefore his mortgage APR (the actual cost of having a mortgage) could be much higher than the rate he can get with an ISA (or so close as not to be worth the worry).

3) Except for my pal

4) Agreed!

5) Agreed!

The main bugbear I have with MSE is when people make statements such as "Without doubt, I am right. This is the the best thing to do". because we simply do not have the financial details (and sometimes the financial knowledge) to make these declarations.

All we can do is offer options (as I did when I mentioned the IF ISA offet option) and the OP can consider all of them and make his decision.