Mortgage Offset or ISA

Any savings which you offset are in effect earning you interest tax free at the mortgage loan interest rate, instead of at the normal savings rate which would otherwise apply.

Therefore if your ISA rate is a little higher then the mortgage rate, then it's better not to offset it. If it's lower, then it's better to offset it *provided* it doesn't jeopardise the ISA status.

You should continue to move the annual ISA allowance from the ordinary offset savings into the ISA (whether offset or not).

If I understand Ronald correctly then I would just like to say that I agree with him wholeheartedly.

If you intend to pay your mortgage off within the next 5-10 years and you can't roll your ISA money into the mortgage offset account without closing the ISA it may nonetheless be worth keeping the £12.5K inside the ISA wrapper even if it pays slightly less than the mortgage costs.

Once you've paid off your mortgage, you will be looking for maximum income for your savings and it will be difficult to beat tax-free interest unless you're prepared to take some risk.

Anything you lose now by keeping the money under the ISA wrapper (instead of ploughing it all into the mortgage) you will probably recoup in the first few years after becoming mortgage free by maintaining the tax free status of the money.

I would also agree with Ronald in-so-far-as you should consider continuing to fill your ISA allowance each year from your offset savings, as long as you can also maintain a sizeable offset pot for a rainy day (e.g. 6-12 months salary at a minimum). You'll be glad of the large tax-free savings pot when your mortgage is finally paid off.

Reestit Mutton

Thanks to you both.

I guess my point is also that if I keep the payment the same, despite the offset, which is the norm with these kind of mortgages, the amount of capital gets paid quicker. I think that's what I was driving at. Does that change things?

My advice would be as follows:

(1) ask the mortgage company to set the monthly mortgage payment to be "net" - thus taking into account the balance in your offset account. Request that your mortgage is paid from your offset account (where you always expect to have a significant surplus of cash).

NOTE: gross mortagge payments are simply a way of overpaying on the mortgage - the mortgage company simply calculates what the monthly payment would be without your offset balance, although the interest due is still consdiered to be net of your offset savings account balance. i.e. the payment includes more capital repayment than normal.

(2) assuming that you don't have to pay your income into it every month, set a fixed amount to be transferred into your offset savings account each month to at least cover the expected monthly mortgage payments. However, if your income can support it, try and pay more than you need to.

(3) again, assuming your income isn't paid into your offset by default, every couple of months or so assess the balance on your current account and consider an additional lump sum payment from your current account into your offset savings account if a surplus has built up.

(4) when the time comes to consider whether to subscribe to another year's ISA, you simply take back what you need from your offset savings account to fill the ISA. Ditto if you have major capital outlays such as work being done on your house etc...

The bottom line is that it makes no difference to the interest you pay whether the money is in the mortgage or the offset savings account - the only difference it makes is to the capital portion of your monthly mortgage payments (and only if your mortgage is capital and interest) as the mortgage company still has to recoup the outstanding capital from you over the remainder of the mortgage term (the mortgage company considers your capital debt to be whatever is in the mortgage - the size of your offset savings are ignored for this purpose as you could withdraw them all tomorrow without so much as a by your leave i.e. they are not secured funds). However, once your net position is zero, you can just leave the whole thing well alone and let the offset savings slowly work their way into the mortgage account (as the net interest charge will be zero).

Basically, I would keep as much funds freely available as possible for as long as possible as it costs you no more to do so. Only pay the minimum possible into the mortgage each month but the maximum possible into your offset savings account to offset your interest. Borrow from the offset savings whenever you have to, such as when you need/want to subscribe to a new year's cash ISA.

HtH Reestit Mutton

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Ed.