Save - repay - or isa?

njb1978 · 1 July 2006 at 2:27PM

Hi thanks for looking -

Long story short I have been overpaying my nationwide fixed rate mortgage by the maximum £499.99 a month, which charges 4.69% APR

Having opened a A+L premier direct current account I now have access to a regular saver account which will pay 10% gross p.a./AER after a fixed and limited period of a year – if I have paid in the agreed amount each month.

Halifax’s new High Interest Current Account will pay 5.12 APR .

Assuming I continue to have £500 ‘spare’ a month, my thinking is to pay the maximum £250 into the 10% regular saver with the A+L (for the 12mths) then leave any extra in my Halifax current account earning the 5.12%.

As both would ‘earn’ more than their equivalent amounts in the mortgage pot would?
I think or hope?

However I keep reading that an ISA should be the first port of call for any savings – this lead me to consider the affect tax may have on the above plan – which then gave me a headache

and lead me to asking were would this £500 a month be best ‘spent’ ???? - any and all help greatly appreciated – thanks again neil

If anything needs clarifying or is not clear, please ask.

dunstonh · 1 July 2006 at 2:49PM

ISAs a are use it or lose it allowance. Unless you use it in the tax year, you can never use it again. So for long term planning, utilising your £7000 allowance can be more beneficial than paying the money off early.

ISAs (equity more than cash) are a great way to provide a tax free income later in life as well as providing ad hoc payments for your needs. Having that flexibility and investment growth potential can often be better than repaying the mortgage.

Miss_Penny_Pincher_2 · 1 July 2006 at 3:12PM

njb1978 - I view this in a very simplistic way... basically if you are cautious (like me) and looking to save rather than risk money on investments (I get the impression from your post that you are more interested in saving) then any money saved should ideally earn more in interest than you are paying on the mortgage.

With a 4.69% mortgage investing the money into a tax free ISA as long as the interest rate is at least 4.7% then you are beating the mortgage company

I think the Halifax has a mini-cash ISA paying 5.20% at the moment. Mine is the NS&I at 5.05% so I think the Halifax one is probably better.

When it comes to other savings account which are taxed then, assuming you are a basic rate tax payer with interest on savings taxed at 20%, to earn enough to beat the mortgage the interest rate needs to be at least 5.9% to take into account the tax that will be paid so the A+L regular saver is great!

kenshaz · 1 July 2006 at 3:21PM

I thought Halifax ISA was 4.75%,am I correct or has it gone up recently.
Just checked,2yr fixed rate is 5.1%

njb1978 · 1 July 2006 at 3:37PM

Cheers to everyone - especially Miss Penny Pincher - that simpy summed up that which I couldn't think through without seeing it in balck and white from someone else :j

Miss_Penny_Pincher_2 · 1 July 2006 at 8:04PM

Thank you njb1978

It took me a while to get my head round it too! In the end I took Martin's fountain example and listed all my savings accounts and the interest rate before and after tax so they are in the order of highest interest first. It lists something like this:

A+L regular saver 10% before tax (8% after tax)
Lloyds TSB monthly saver 8% (6.4% after tax)
Halifax Regular Saver 7% (5.6% after tax)
NS&I mini-cash ISA (6.3% equivalent before tax) 5.05%
Mortgage (equivalent to 5.9% before tax) 4.69%
Halifax High Interest Current Account 5.12% (4.1% after tax)
HSBC Online Saver 4.75% (3.8% after tax)

Simply listing them like this with the amounts in each account focused my mind on putting my savings in the highest interest paying accounts first, then the next highest and so on. It was a shock because I thought I had been doing OK but seeing it on paper made me realise that actually most of my money was sitting in a 4% account! Listing the mortgage on there makes it clearer for me where I need the majority of my savings to be to beat the mortgage company!

clipboard2 · 1 July 2006 at 10:46PM

Hi njb1978! As you have a Nationwide mortgage and are able to make overpayments, when your fixed rate term comes to an end, suggest you consider their standard repayment mortgage. The slightly higher interest rate is IMHO a small price to pay for the freedom to make unlimited overpayments free of charge and become mortgage free quicker than you thought possible. I did this myself!!

Its generally accepted that you should have, say, 6 months salary in instant access savings as a financial cushion.

But, beyond that, it makes no sense at all to have both debts (including a mortgage) and savings simultaneously. Take a daily look online at the interest being added to your mortgage. No savings account is going to beat the power of compound interest working against you, as it is with a large debt, like a mortgage. Otherwise the banks would go out of business!!

The regular savings accounts offering apparently impressive rates e.g.Lloyds/TSB - 8% for 2 years are not actually giving you that much extra money when you do the maths due to the drip-feed effect.

Make getting rid of that debt (mortgage) priority no 1, and very soon you'll have the joy of watching your saving pot follow an exponential curve as compound interest works in your favour!!

njb1978 · 3 July 2006 at 2:42AM

Cheers for your input Clipboard2 and to everyone else I feel a lot happier with my understanding of things now - Oh and Miss Penny Pincher this..........

A+L regular saver 10% before tax (8% after tax)
Lloyds TSB monthly saver 8% (6.4% after tax)
Halifax Regular Saver 7% (5.6% after tax)
NS&I mini-cash ISA (6.3% equivalent before tax) 5.05%
Mortgage (equivalent to 5.9% before tax) 4.69%
Halifax High Interest Current Account 5.12% (4.1% after tax)
HSBC Online Saver 4.75% (3.8% after tax)

.......is now above my monitor, thank you again - cheers njb1978

jamesd · 4 July 2006 at 9:09PM

clipboard2, using the figures from Miss Penny Pincher the benefits of the regular saver accounts compared to a 4.69% mortgage for a basic rate tax payer are:

A&L 1 year: £49.65
Lloyds 2 years: £120.72
HalifaxR 1 year: £13.65

Being £184.02 better off for little more work than setting up some standing orders isn't too bad a deal. It's roughly equivalent to not paying interest on £4000 of the mortgage.

For a higher rate taxpayer the A&L account produces a benefit of £19.65 and the Lloyds a benefit of £3.85, while the Halifax loses money.

steviehudds · 6 July 2006 at 8:44PM

Thanks Miss Penny Pincher

Listing the Savings fountain has help me understand where to put my Money.Its simple when you look at the list!!

Why didnt i think of this!!

Thanks

Stevie

Miss_Penny_Pincher_2 · 7 July 2006 at 7:15PM

I'm glad it's helped

njb - I have a Nationwide mortgage too and am scrimping to pay the £500 overpayment every month while I can

It was useful for me seeing in black and white that, despite what I'm always being told, a mini cash ISA isn't always necessarily the best choice especially when it pays (according to moneysupermarket) the measly 3.45% offered by A&L or even 1% by First Trust Bank (NI)!! Having said that, I've got the maximum £3k in the NS&I at the moment though while I'm drip feeding the maximum possible to the higher interest accounts.

Save - repay - or isa?

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