What about tax-free savings?

jetfighter

I think I may have asked a similar question to this in the past, but for a different reason. :rolleyes: My reasons for asking are different this time and the scenario is different, too.

Our situation is as follows:

£45,000 mortgage at 6.59% interest on 2-year fixed rate, ending August 2009
(overpayments allowed with NO penalty unless you repay in full)

£12,000 in cash mini ISAs at 6.1% interest

At the moment we are overpaying by about £900 a month from our salaries. This is based on a household income of about £2,000 per month. Our required monthly payment is about £300.

Bearing in mind we are 26 and 28, and plan to start a family within the next five years (after which we would be living on one person's income for a while) would you:

a) continue as is, making overpayments on the mortgage as much as possible, but keeping the savings for when we need them;

OR

b) withdraw the £12,000 from our cash mini ISAs and put that money into the mortgage, reducing our debt?

At the moment our mortgage is costing us roughly 0.49% in interest as we're offsetting with the tax-free ISA interest, but are our savings more valuable in the long term if we keep them in the ISAs? Bear in mind we have a mortgage we can get funds out of as well as making overpayments - effectively it can be used as a high interest savings account.

If we had bog standard savings in a bog standard savings account (not ISAs) I would put it all into the mortgage unless we needed it in the short term, but the waters become a bit murky when it comes to tax-free savings. My partner likes to think of ISAs as kind of untouchable and I tend to think the same way, but just curious to know...

What would YOU do?

ailuro2

At your current overpayment levels your mortgage will be finished in three to four years anyway. I'd leave the money in the ISA for long term tax free savings, and keep overpaying by that £900 every month. If you each earn around the same when you take time out to have a child, then the 1200 you have been paying to get rid of your mortgage will mean you don't miss the other salary. Remember you might qualify for benefits too, once you only have one wage?

Well done for being so sensible at such a young age! (Any age beginning with a 1 or a 2 isn't usually so savvy when it comes to money)

jetfighter

Thanks for your reply!

I would say I earn around £900 a month at the moment and my partner earns £1,100. I would be the one taking time out to care for a child, so even though I am hoping for a salary increase within the next 6 months, I'll probably only go up by about £100 a month so will still be earning a bit less. We can definitely live on one salary as we've done it before, when I was studying and then taking time out after studying.

I think deep down I know Option A is the sensible option, but just curious to know if anyone wants to play devil's advocate and make me think about something I may have missed! I've gone over it all in my head but I'm still a money-saving intermediate, not quite an expert yet, and I don't know the ins and outs of everything! (I'd forgotten about benefits, for example.)

I know what you mean about ages beginning with 1 or 2, though some people I know have ages beginning with 3, 4 and 5 and still can't manage their money adequately! We've always been careful with money but I think we decided about 2 years ago that we were going to start being very sensible and boring! I talk about money-saving tips to my friends and it's kind of rubbing off on them now.

(BTW, your mortgage-free stats are admirable! Well done!)

dimbo61

hi jetfighter
keep your savings in your ISA as always good to have an emergency fund
to keep your standard of living and pay for time off work enjoying your kids !
you could shop round and transfer some or all into barclays 6.5% or £9000+
into lloydstsb fixed 6.5% ISA,s then you have same rate as mortgage.
keep up the overpayments and you could well be mortgage free before at
you start a family. try to keep savings under £16k as would affect any benefit claim if you had more than this amount ! GOOD LUCK

Kaz2904

I see you are already offsetting. Well done.
The thing that I'd not considered with ISAs and offsetting is that obviously you don't earn any interest on your ISA. That's because you save interest on the mortgage. Someone pointed out the other day that the interest in your ISA is also tax free. So every year you are adding to your tax free savings.
So to this end you would need to decide whether you can beat your mortgage interest rate with your ISA and if you would rather be mortgage free or have stacks of money in the bank.
Trouble is with savings that it will count against you for benefits. Also more spendable from savings. For your current situation I would say stick as you are- go for it!

dimbo61

must aslo add when /if you start a family the benefits system
would make up most of your LOST ! wages
working tax credit
child tax credit
child benefit
mat leave etc
just something to consider when planning your future GOOD LUCK !

Kaz2904

Not neccessarily- We get child benefit of £120 every 4 weeks for 2 children and tax credits of £42 every 4 weeks.

Looking again at the figures earned by this couple I think that they are 2 of the unfortunates who Gordon is stitching up like a kipper by abolishing the 10p tax code so I'm sorry to say that they will probably not benefit all that much from the benefits system when they have children.


Once again the workers are being let down by the system but don't get me up on my soap box!

jetfighter

Thank you very much everyone - I really appreciate your input on this.

dimbo61, that is very interesting about savings under 16k and benefits. I didn't know about that! We may well do another ISA transfer (did 2 each last tax year!) though I'll wait until rates have adjusted following the recent interest rate change. We wouldn't be able to do the Lloyds TSB one as we have £6k in each ISA but the Barclays one may be okay - I do prefer online accounts though.

Kaz2904, we would definitely rather be mortgage-free than have stacks of savings - we haven't needed to dip into our savings in over 2 years now so that money really is just sitting there until we do need it. I too am more than a little irritated by the abolishment of the 10p tax - turns out I am £40/year worse off and my partner is £40/year better off so it balances out for us and makes us £0 better/worse off, though I am supposed to be on the same pay as my partner, in which case we would be £80/year better off - madness that us lower earners lose out!

Anyway, thanks again.