Cash ISA v Offset Savings

CopperPlate_2

Wondering whether there is any benefit in opening a Cash ISA this year and paying savings into this, or whether to continue trying to put the money into an offset savings account linked to my mortgage which is a fixed rate of 5.8%.

Now I know that the offset mortgage option is more tax-efficient for higher rate taxpayers and less so for standard rate taxpayers - but when I can get a variable rate ISA at 6.5%, I'm wondering which is the better vehicle for saving into? For example, from the first direct site:

Benefit from the equivalent of 10.47% AER* for higher rate taxpayers, 7.76% AER* for basic rate taxpayers and 6.17% AER* for non-taxpayers

I know it's AER but these are higher figures than the cash ISA. Any suggestions?

C

Milarky

People will say: "You've got to use your ISA allowance for the year or lose it" and (when the question of interest comes up) : "You only get the benefit with the full amount invested for the full year".

Both true. But equally true in your case that 5.8% in an offset mortgage (which I suppose is a good rate these days) is still 5.8% 'tax free' savings - the equivalent of an ISA at that rate - and not restricted (i.e. you can constantly re-offset if you were taking money out and paying it back in again whereas the ISA can't be touched)

So from this vantage (if it is 'either or' with the amount of cash you have to burn) then a fixed offset at a slightly lower rate than an ISA equivalent seems to be preferable

[But forget the silly number in bold - the only figures of note are the '5.8' and '6.5' ones]

debbie42

I agree with Milarky. The figures in bold are for comparison with accounts that are not tax free. If you compare with an ISA rate then those figures are irrelevant.

My view (having an offset mortgage) is that your personal spend/save mentality makes a bit of a difference as to how you use it. I like to see the balance going down on our mortgage, so save more diligently than I might via other accounts.

The facility we have is now much larger than the balance. I doubt that would suit someone who liked spending money! Whereas an ISA is sometimes perceived as being more inaccessible (even if it isn't, in reality).

CopperPlate_2

Thanks for this. My own view is that I'd rather see the balance in the offset savings account grow (as I can't link an ISA to the mortgage) and see on a monthly basis how much less interest is being charged to the mortgage account, than have an ISA with another/same provider which is earning slightly more interest. The whole point, for me anyway, of the offset mortgage was to allow the savings to work for me tax efficiently. I pay higher rate so anything to reduce the amount of tax I pay is welcomed! I suppose as you've said, there is no limit on the 'tax free' savings that I can put into the offset savings account in a year and although it pays slightly lower than the ISA's out there the rate is fixed for a couple of years. Thanks for explaining it like this - beats the blurb and sales pitch on the bank websites!

nrsql

The ISA would give a better return.
As said it's easier to get the money out of the offset account (but is that an issue and is it a ro or con).
If the ISA rate goes down you can always take it out and apply to the offset accout - you would be able to do it the other way round after the end of the financial year - it will be lost.
Also when you have paid off the mortgage you won't be able to use up previous years ISA allowances.

So financially you will be better off using the ISA.
But that's not everything.

You could use the offset account then decide at the begining of next year whether to use up the ISA allowance.

Milarky

Just to point out the someone called 'bernie' posted here some time back about having stumbled on the ability to offset his (and his wife's) cash ISAs against their mortgage - as well as the normal savings. It was explained that this was agreed with the bank and seen as a 'cashflow' (short-term) election while he was awaiting other funds to become available. This prevented them cashing in their ISAs and losing the concessions they had built up.

When it came to the 'new tax year' he was able to transfer his annual allowance from the normal offest savings into the bank's ISA - so that he was increasing future ISA balances that way.

You wouldn't think that ISAs could be 'collateralised' in this way - but evidently mortgages didn't worry the taxman or else the scheme would never be offered.