Mortgage rate vs ISA rate

simple answer: yes, you are correct.

more detailed reasoning:

What's more, unless you have an offset type mortgage, your overpayments are generally not freely available for withdrawal in an emergency. Payments into the ISA (unless it's a fixed-term product or one with a notice-period) generally are freely available to draw on for emergencies. Why tie your money up any more than you have to by overpaying your mortgage when your ISA rate is competitive?

Should the equation swing significantly the other way, with your ISA rate dipping *significantly* below your mortgage rate you could always take some of your ISA money at that point and pay down the mortgage.

However, unless you really don't see yourself paying off your mortgage for a very long time, I would still be tempted to keep the ISA money within its tax free wrapper. Once you've finished paying off your mortgage you will be glad that you still have a sizeable pot of money earning interest tax-free.

The only exception to the above rule (in my books at least) would be if base rates spiralled out of control, resulting in your mortgage rate dwarfing your ISA rate, and you found it difficult to make ends meet on the mortgage.

HtH Reestit Mutton

Thanks for your answer-another thing I'm wondering about is whether to take a payment holiday (no extra cost, except for the interest accrued on the remaining balance over the time I could choose to take the holiday for) and save the mortgage payment into savings as well (assuming I can get >4.99% AER net elsewhere after I've topped up my ISA allowance). Is that a more profitable option too, to take say, a 6 month payment holiday (i.e., stop paying the mortgage, by agreement, for 6 months) and stick the money I'd normally pay in mortgage payments into a high interest rate account? Would that make me more money than just paying off the mortgage? Thanks.

gim

No it wouldn't. Not if it's an ordinary high interest account which gets taxed. What you need to do is compare 80% or 60% (depending on whether you're a higher rate taxpayer) of the savings interest rate with the mortgage rate to see which is best.

So if you're a standard rate taxpayer, to make your scheme worth it, the savings account would need to pay more than 6.2375% to beat a mortgage rate of 4.99%. An ISA, on the other hand, is not taxed and so would only need to beat 4.99% itself, but you need to consider the wisdom of "wasting" ISA pay-in limits on an amount just you're going to withdraw at the end of the holiday, though if you have other savings to crack instead, to fund a lump sum payment to make up for the holiday, then that would be OK.

It depends on the Chancellor - how long will ISA rules remain It depends on how long it will take you to pay of the mortgage It depends on your tax status, should it change in the future (unlikely but should you become a non-tax payer, the ISA status is effectively worthless).

And it depends on how much admin you can tolerate: you may have to keep switching ISAs around to keep the best rate. Consolidating everything in a mortgage is much simpler. It is what I did, although I think I lost out marginally because I am lazy.

So the short answer is to stick with the ISA.

Thanks-after a bit of thinking, doesn't it actually depend on how much of the mortgage term (and capital remaining) is left, and how much the payments (potential savings) are? Let me illustrate:

Supposing 100, 000 @ 4.99% over 25 years (584.01 per month) Full balance remaining 100 000 After 6 months of not paying, 102, 096.53 is outstanding (+2,096.53) After 6 months of paying, 98,980.41 (-1,019.59)

Saving monthly payment of 584.01 per month over 6 months @ 4.99% net 3,540.69. Then take off the 2,096.53 and you are left with 1444.16 or roughly 424.57 extra over the other option, not bad, especially if you can get >4.99% net and jiggle cash for a few months. Or is it?

Suppose you then tweak the above scenario so the mortgage term is 5 years instead of 25, then:

After 6 months of not paying, 102, 521.08 is outstanding (+2,521.08) After 6 months of paying, 91,082.76 (-8917.24)

Saving monthly payment of 1886.67 per month over 6 months @ 4.99% net 11,438.35. Then take off the 2,521.08 and you are left with 8917.27 - a whole 3 pence more (ie, even at 4.99 net!).

In my actual scenario, I've got approx xxk left over 5 years and by not paying, I would have to earn about 670 in interest on 4980 in 6 months to make even! So, to answer my own question, I think it depends on the circumstances! Or have I cocked up my calculations somewhere?!

No it doesn't. Should ISAs vanish overnight, then you simply need to re-evaluate where you put future overpayments. The cash is at least there, and if need be the saved-up dosh can be paid into the mortgage account as a lump sum. The key figure you are trying to maximise is the sum of real and virtual savings (i.e. the sum of how much you have accumulated in the ISA and how much has been paid off the mortgage over the same period).

No it doesn't. It depends solely on what the mortgage interest rate is. Each overpayment you make into the mortgage (compared with not doing so), is equivalent to putting the same amount into a savings product which pays interest at the mortgage rate.

The only limit is that you can't make overpayments which would cause the loan balance to go negative. Once you've paid the mortgage off, all your overpayments which have helped to bring that about are *still* (after a fashion) "earning" you interest in the sense that you have liberated a fraction of your income stream which would otherwise have had to be dedicated to servicing the loan.

Possibly, though having become a non-taxpayer, there is still a possibility of becoming a taxpayer once more. It's also possible that you might become a taxpayer *as a result* of cashing in the ISAs and putting the dosh in non-ISA savings accounts (you might have other income just below the tax threshold and the savings interest might push you over it).

But it's true that in general ISA interest rates tend not to beat non-ISA rates, and it isn't immediately obvious why that is so.

Agreed.

Laziness is its own reward, right enough; this is often overlooked.

No. The monthly interest rate is 0.41583%, and hence after 1 month of not paying, the balance is £100,415.83, and this compounds, so after 2 months it stands at £100,833.40; after 3 months at £101.252.69; after 4 £101,673.74; after 5 £102,096.53; and after 6 months it's £102,521.08.

Agreed. So the difference between paying and not paying is £3540.67.

I.e. exactly the same (to within rounding error). This demonstrates that putting money into a savings account (which pays the same amount of interest as the loan account charges) is *equivalent* to paying it into the loan account instead.

No, this is all rubbish, I'm afraid.

Yes! Where did you get this from? And why didn't you get the same figure for the first example?

Yes. So the difference is £11,438.32. See?

Yep.

No, this is nonsense.

'Fraid so.

This is true if the ISA rate is above the mortgage rate. But very often it is not, and most people do not change accounts regularly enough to ensure that it is. So a more realistic question is should I keep an ISA going, even if the interest rate is slightly lower than the mortgage rate...?

The point is the benefit of ISAs is long term roll up of tax free interest. So when I closed my ISAs, I lost those tax free-allowances for life, or rather however long the chancellor decides to keep ISAs going Meantime my mortgage is paid off. I would still have been better of with the ISA long term, so long as the chancellor didn't meddle to much with the regime.

See above.

Thanks for the assistance!-I've found where I went wrong-I only counted up to month 5 instead of 6 which cocked the rest up. Whoops.

It seems so. In fact, now I know where I went wrong, I've gone on to calculate that with the highest possible rate of 6.4% net I can currently get on a max 3k limit would net me over a 6 month payment holiday a whopping 14.82!

So in conclusion: A lot of hassle for not much gain. Dastardly banks!

Thank you Ronald for your help.

I'm not sure I agree that it would be as much as that.

But how about, instead of taking a payment holiday and diverting the mortgage payments into an ISA, you keep the mortgage payments going, but borrow an extra £3k on the mortgage and put it into the ISA as a lump sum?

That should leave you not just £21.21 better off after 6 months, but £42.57 after 12, and ... And you can repeat the exercise next year, and next ...

Yes, I know I did actually calculate the whole of my savings at 6.4% net over 6 months rather than stop at the 3k limit, so yes, it'd probably be a few quid less should I put the rest of it in a >4.99% and But how about, instead of taking a payment holiday and diverting the

Cunning. Unfortunately for me, any change in mortgage terms with my current lender would require a whole new mortgage agreement and consequently fees, etc, so that plan will sadly have to remain a theoretically good idea. Maybe next time!

I do, I just wondered where your mistake was this time. :-)

Well, if you should happen to have other savings of £3k or more, you could "borrow" £3k from there to lump-feed the ISA, instead of from the mortgage. That would save you even more if the net interest rate on the savings is less than the mortgage interest rate. In fact if the "savings" are just sitting in a current account (non-interest-paying), you'll be the whole

6.4% [compounded] better off. If cracking that nest egg would embarrass your short term cash flow, you could then still consider the payment holiday, but not necessarily for the whole 6 months.