Mortgage offset V Cash ISA

magicdogsbrain

Currently I have a lifetime tracker current account mortgage which is BOA base + 0.44 (so 5.44 at the moment).
I understand the idea of cash ISA’s in that you have tax free savings of 3600 for life. But there are only a few that give as much as 5.44%, and most of them are yearly interest with bonus – you actually less incentive and more haste than my offsetting.
Are there any experts out there that can comment? I have 26 years to offset – and I plan on offsetting until I can buy a bigger house in 5 or 6 years – so I will need my offset. How can I quantify ISA verses mortgage?

kingmonkey

Martin explains the pros and cons well in his 'should I save or pay off mortgage' article.

Basically to be worth while saving rather than paying off your mortgage you would need an account that offered 6.8% or 9.1% depending on the rate of tax you pay. As ISAs are tax free then you only need an account that pays more than 5.44% - and there are loads of those, who cares if interest is yearly of monthly. You'll be wanting to keep the interest in the ISA anyway to benefit from compounding.

There are regular savers and fixed term accounts that offer above 6.8%

Baldur

magicdogsbrain wrote: »

I understand the idea of cash ISA’s in that you have tax free savings of 3600 for life.

Probably more correct to say that you have tax free savings of whatever the annual allowance is (currently £3,600 p.a.), plus accumulated interest, every year for as long as Cash ISAs (or any such future replacement scheme) are permitted by government legislation.

Bernie

...your mortgage.

The wife and I were faced with a dilemma a couple of years back when I left the military and we needed to buy a house. We had the cash to buy outright but would need to surrender the two ISA we'd built up over 11 long years. We went for an offset mortgage. This enable us to 100% offset from the start using the ISAs without cashing them in.

Now we have received other funds (Service pension, policy payout, the wife's redundancy and continued earnings), we have been able to transfer the ISA out of the offset having replaced them with other funds. The max-ed out ISAs are now parked where they are earning maximum tax-free interest. Indeed, we've opened new ISAs to keep within FSA protection.

We will always be grateful to Intelligent Finance for the arrangement.

Don't tell Grasping Gordon....

:beer:

magicdogsbrain

First of all, I am not interested in paying off my mortgage – I am offsetting at the moment so that I can buy a bigger house in 5 or 6 years. I will buy with the same mortgage because my mortgage rate is good.

I guess I need to understand the compound interest being reapplied to the ISA. If I took 3600 out of the offset in my mortgage, in 12 months it would cost me 200.80 pounds with 0.544 compounded monthly. I work that out at about 5.57% yearly equivalent interest.
The Nationwide 2 year fixed rate bond has an interest rate of 6.15 annual or 6.11 monthly interest – but you can’t apply interest to the ISA unless you take the yearly ISA. It’s not clear if that uses the following years allowance or not (I guess it does).

I am not interested in bonus ISA’s because I don’t want to spend all my time juggling ISA’s and moving them every year.

If I can find a long term ISA with an annual rate more than 5.57% - and you can reinvest the interest – I may be interested.
Any ideas?

magicdogsbrain

Bernie wrote: »

...your mortgage.

The wife and I were faced with a dilemma a couple of years back when I left the military and we needed to buy a house. We had the cash to buy outright but would need to surrender the two ISA we'd built up over 11 long years. We went for an offset mortgage. This enable us to 100% offset from the start using the ISAs without cashing them in.

Now we have received other funds (Service pension, policy payout, the wife's redundancy and continued earnings), we have been able to transfer the ISA out of the offset having replaced them with other funds. The max-ed out ISAs are now parked where they are earning maximum tax-free interest. Indeed, we've opened new ISAs to keep within FSA protection.

We will always be grateful to Intelligent Finance for the arrangement.

Don't tell Grasping Gordon....

:beer:

Good idea - That would be idea for me - I asked the telephone customer service person at my BS and they said they cant do it. How did you "arrange" it? I assume the ISA's were with IF or Halifax? :beer:

Baldur

Among others, Norwich & Peterborough do a 2-year Fixed Rate ISA bond @ 6.25%, Halifax do a 4 year fixed rate @ 6% - see this post.

lisyloo

Basically to be worth while saving rather than paying off your mortgage you would need an account that offered 6.8% or 9.1%

This does of course refer to an account on which you are paying tax (just to clarify).

If I can find a long term ISA with an annual rate more than 5.57% - and you can reinvest the interest – I may be interested.

I've got my ISAs with Ruffler bank which currently pays 6.25%.
I can't guarantee it (obviously) but I believe they will be competitive long term as they are a small bank and therefore need to be good to compete with larger banks that have wider offerings and a high st presence.

Also you might like to look at the Woolwich (Barclays) offset tracker.
It's BOE +0.74 (currently 5.74%) and you can offset ISAs (I believe you would have to transfer them to the Woolwich/Barclays to offset).

Tradtionally you should be able to find ISAs that pay more than the mortgage but I don't believe you can rely on that in these times of an unprecedented credit crunch, so this mortgage does have the offset option should banking get more expensive in the future.
Preserving your ISAs is a good bet.
You would have to substitue your number but my mortgage overpayments are tax free for 8 years (term) whereas the ISA is tax free for about 40 (life).
Obviously I don't know how long life is, but it goves you the idea.

You should obviously also consider the other featuers of the mortgage.
It's variable, a pretty good rate, linked to the BOE rate and the fees aren't too bad (£595 I think).

magicdogsbrain

I am thinking that my best option is to open a 1 year fixed ISA with my BS and try to convince them to allow their ISA to be offset.

nrsql

Your mortgage rate is variable so be careful at taking a long term fixed savings account in case rates increase.

I have Icesave, Egg and Barclays (don't recommend it) cash ISAs which all pay over 6%. There are a number of others too - have a look at the tables.
There's the Halifax regular save which you can pay £500 per month into to get 10% which will work out better than your mortgage rate but you would have to do something with it after a year. There are other regular savers that give high rate but it's a bit of effort.
Also have a look at the Birmingham Midshires fixed rate bonds - you can keep paying in to them over the fixed rate period and might work out slightly ahead if you are a basic rate taxpayer - probably a lot of effort for little reward.

I they let you offset the ISA then it won't be a fixed rate - you won't get any interest it'll just reduce the mortgage - also means it doesn't increase the amount in the ISA.

I have a suspicion that anything you do isn't going to make you a lot compared to keeping the money in the offset - the benefit you might get though is building up a tax free amount in ISAs which will give you the shelter if you decide to do something else in the future and can always take it out if the Boe rate increases and ISAa don't (which I doubt).

Bernie

magicdogsbrain wrote: »

Good idea - That would be idea for me - I asked the telephone customer service person at my BS and they said they cant do it. How did you "arrange" it? I assume the ISA's were with IF or Halifax? :beer:

Yep! With IF, simply transferred them to them just prior to taking out the mortgage. Interest rate was not relevent to us since they would be offsetting the mortgage.

At the time, we had to pay £400 arrangement fee for what became a £124K interest-free loan over 10 years. As we pay no interest, the current account goes down by XXX each month, the mortgage by the same. Each month, the premium reduces because no interest accumulates so we're "over-paying" each month!

So far, we have paid just £2.84 in interest - no idea how, must have been the time it took some to press "Enter".

However, the main point of it all was to preserve our ISAs.

Still, it's nice to have all the cash still there, slowly diminishing over the years, paying back the mortgage. Its there should we need it at any time - and it's not really ours, anyway since we bought the house! Had we paid outright, it wouldn't be there at all...