Best Mini-cash ISA rates?

I hope that by "just" you don't mean what I think you do. Contributing to two mini-cash ISAs in the same tax year is very naughty.

What exactly is the principle?

What significant difference does it make whether the interest is added to the ISA jar or the mortgage loan jar? They're all, as you say, under the same roof. What's the ISA interest rate and what's the loan interest rate? Chances are the money is doing a better job (working harder for you) paying down the loan by a few hundred pounds a year than boosting the ISA credit balance by the same.

It is unlikely that you will get a rate elsewhere that is better than your mortgage rate.

Having said that, look at Nationwide and Cheltenham & Gloucester.

One each for my wife and I.

The principle is deception - I don't appreciate it. Having been through the sign-up process I consider this to be extremely dishonest - especially as the forms even ask how the interest should be handled!!

This is a long (10 yrs+) 300/month savings plan towards my childrens' education and I want it entirely seperate from my mortgage - and also to watch it grow over the years not just see my mortgage reduce marginally each month.

Fair enough [but it's "for my wife and *me*" :-)]

Fair enough, if the forms gave you the option, it's reasonable to expect them to act on your choice.

What's the timescale of your mortgage? The reduced debt is pretty well equivalent to boosted savings, because it frees up future income that you can divert directly to their education instead of having to earmark it for paying down the loan.

Without a hint of irony, Ronald Raygun astounded uk.finance on 06 Jan 2005 by announcing:

Then you'd be getting 6% on the ISA.

I was talking explicitly about the IF ISA in conjunction with an IF loan. I have a loan at 6.9% and therefore am earning 6.9% on my ISA (the whole amount, since the value of my loan currently exceeds that of my ISA). If it was a regular savings account, there'd be no hesitation in offsetting the interest due to the tax due on any interest received. Am I better paying off my loan earlier or earning extra interest on my ISA?

Without a hint of irony, "Bill D" astounded uk.finance on 06 Jan 2005 by announcing:

OK, I'm with you now.

Wait a minute. If the ISA capital is offset, it simply means you don't pay interest on that much of the loan *instead of* earning interest on the ISA. That being the case, there shouldn't even

Either way:

OK, but the ISA rate is only as high as the loan rate for as long as the loan balance is big enough. Once the loan is paid off, the ISA rate will drop to (let's say) 5%.

Which way are you better off if you had the choice? Well, that depends on the timescales. If the ISA interest is credited to the loan account, this money in effect also earns interest at the loan rate by paying the loan off sooner. But it causes the ISA balance at the end of the loan term to be smaller than it would otherwise be. Let's say there would be £5000 more in the ISA. The ISA would therefore be earning £250 per year more, "forever", from loan end, but loan end would happen later as a result of those £5000 not having been paid off the loan. That will have cost you an extra

Without a hint of irony, Ronald Raygun astounded uk.finance on 07 Jan 2005 by announcing:

If I took that option, yes. I have, however, opted for the other option which is to receive interest at 6.9% on my ISA and pay interest at 6.9% on my loan.

(I may have the actual numbers the wrong way round but basically...)

Option 1: Pay x% interest on your loan and earn x% interest on your savings product up to the amount of your loan. If your loan exceeds your savings, you get the loan rate on your entire savings.

Option 2: Earn no interest on your savings product and pay no interest on the loan up to the amount of your savings. If your savings exceed your loan, you pay no interest on your loan.

Yes. Also, as soon as the loan amount drops below the savings amount you earn the 5% on the excess savings.

But you'd have been getting that 6.9% (extra 1.9%) on the equivalent balance of your savings as well. Let me add to my "if it were a regular savings account" statement that if it were still tax-free but unlimited contribution, I'd probably offset. It's the fact that the contributions are capped which suggests the best course of action is to take the interest especially if the ISA is a long-term option. If the ISA is going to be cleared out in the short term then, again, there's probably not much point.

Looks like it's not as straightforward as I though but, since I have no intention of using the ISA for short-term savings, Option 1 above makes more sense *for me*.

OK, but although it says you may elect to *earn* the interest, it doesn't say here that the interest earned will be retained within the ISA itself, causing it to grow without reducing the amount of new money you can add before reaching your £3k annual quota.

Most standalone ISAs offer the option of retaining the interest or paying it out. Ideally there ought to be three sub-options within option 1 here: (1a) Retain the interest in the ISA, (1b) take it out in cash, (1c) pay it off the loan.

The OP seems to have assumed that option 1 meant option 1a, but it looks as though IF deem it to mean 1c and don't really offer a choice of sub-options.

This seems a bum deal once the loan gets smaller than the savings. You pay no interest on the loan, but you still get no interest on the savings, not even on the excess of savings over loan, unless there's a separate sanity clause. So when this happens you should immediately switch to the other option, if they'll let you.

If IF deem option 1 to mean option 1c, then options 1 and 2 are really no different from each other except for slight window-dressing:

Assume in one year you pay £500 into the loan each month (£6000 for the year) and £250 into the ISA each month (£3000 for the year). Assume the ISA balance was such that it earns £500 interest, and the loan balance such that they charge you £5000 interest in the year.

Option 1c: ISA earns £500 interest this year. Loan charges £5500. Result: ISA balance grows by £3000, loan balance shrinks by £1000.

Option 2: ISA earns nothing. Loan charges £5000. Result: ISA balance grows by £3000, loan balance shrinks by £1000.

:-) Seems daft, doesn't it? But it either really is like this, or else IF have simply made a mistake and marked the OP's option choice down as 2 instead of 1. What he really wants is:

Option 1a: ISA earns £500 interest this year. Loan charges £5500. Result: ISA balance grows by £3500, loan balance shrinks by £500.

I said that, didn't I? That bit balances out. Your loan shrinks exponentially instead of the savings growing exponentially. No, that's misleadingly worded. The contribution put into the loan account "grows" just as exponentially when it shrinks the loan as it would do if actually growing inside the ISA.

The difference is that in one case you end up with the loan paid off sooner and a smaller credit balance, while in the other the loan takes longer to clear, costing you more interest, but you end up with a bigger credit balance at that time. The time difference is a factor which needs to be taken into account.

I think you'd need to do a proper simulation and see how it pans out.

Without a hint of irony, Ronald Raygun astounded uk.finance on 07 Jan 2005 by announcing:

Well, it is ;-)

No. What he's not happy about is that he also has standard savings products. He wants to offset their interest against the loan (makes sense since any interest earned is taxed) but wants his ISA interest paid. IF allows you to do one or the other. i.e., if you choose to offset, you offset ALL your savings against ALL your borrowings. You can't offset your savings and current account but have your ISA earning interest, for instance.

I was trying to be brief with my descriptions - I'm sure you don't want me to transpose the entire Ts&Cs. I'll know better next time ;-)

Less basically (but keeping it simple with 1 loan and 1 tax-free savings):

A) You have a loan of 10,000 at 6.9% You have an ISA of 6,000 at 5.0%

Option 1: Pay 6.9% on 10,000 and earn 6.9% on 6,000 Option 2: Pay 0% on 6,000, pay 6.9% on 4,000 and earn 0% on 6,000

Net effect is pay 276 either way, but Option 1 puts 414 rather than nothing in the ISA.

B) You have a loan of 6,000 at 6.9% You have an ISA of 10,000 at 5.0%

Option 1: Pay 6.9% on 6,000 and earn 6.9% on 6,000, 5.0% on 4,000 Option 2: Pay 0% on 6,000 and earn 0% on 6,000, 5.0% on 4,000

Net effect is earn 200, but Option 1 puts 614 rather than 200 in the ISA.

We're back to what offsetting means. It makes no sense to talk about offsetting interest. You only offset capital. With both options the capital in the savings account (whether ISA or standard) in effect earns interest tax free at the loan rate, and this interest is then either (option 1) credited back into the savings account or (option 2) taken off the loan debt.

While the loan balance exceeds savings balance, it makes no difference to how much interest can be earned from re-invested interest, it will always be 6.9% regardless of whether you pay 6.9% less on the loan or earn 6.9% more on savings.

He wants to choose option 1 for the ISA in order to maximise his future ISA earning capability once the loan is paid off.

But why would he want to choose option 2 for the standard savings? He could achieve the same effect, if he really wanted to, of having option 1 on the standard savings by simply withdrawing the interest from the savings account and making an occasional one-off payment into the loan account. But I'm at a loss to understand why he'd even want to do that, since it won't affect his overall position.

Without a hint of irony, Ronald Raygun astounded uk.finance on 07 Jan 2005 by announcing:

Let's say he earns 50 a month interest on whatever amount of savings he has. If this isn't an ISA, then he gets taxed on that 50 leaving him with only

We're obviously talking at cross purposes again. Let me say what I think is going on, and please correct my misunderstanding:

You can either offset a savings account against the loan account or not.

If you don't, then obviously interest is only earned at the normal savings rate and, unless it's within an ISA, is taxed.

If you do, then there are the two options previously discussed, both of which involve you earning savings interest tax free at the loan rate, ISA or not, but with one the money gets added to the savings credit balance, with the other it's taken off the loan debt.

I thought you would have the choice for each of your bagful of savings accounts, whether to offset them or not, but those that are offset all have to be either option 1 or option 2.

It is the offsetting which enables the normal savings interest rate, such as 5% tax free for an ISA, or 5% minus tax for an ordinary, to be boosted to 7% tax free in both cases. It achieves this by pretending the loan debt is actually loan minus savings, and you're paying interest on the reduced balance, so you aren't technically earning any interest capable of being taxed. This works even for non-ISA savings.

They can then give you the option of receiving the money in cash instead of leaving the loan at a reduced level, by simply viewing the payout as re-borrowing.

Without a hint of irony, Ronald Raygun astounded uk.finance on 07 Jan 2005 by announcing:

I think it's an interpretation of the whole offset thing.

No. All accounts with IF are automatically 'offset'. The difference is which option you select. One option gives you the traditional offsetting. The other lets you earn interest at the same rate you're being charged, within the terms I already gave examples of.

There is no option to not offset. Alternatively, one option is the traditional offsetting whereas the other is a non-offset option but which pays you extra interest on a certain portion of your credit balances.

If you select the appropriate option, interest is earned and taxed as normal. The other option offsets the balances and so interest is not earned, but neither is it charged, on the appropriate balance.

As above, all accounts are linked. Think of it as having something like the Virgin One account, except that the different accounts (or 'jars' as IF calls them), although being linked, are kept as seperate balances.