Money...

Headhuunter

If I had, say £5000, lying around (!) would I be better off paying off a chunk of my mortgage or putting it into a cash ISA? Where would I get the best return?

The mortgage accrues interest at 1.5% and cash ISAs seem to pay at 3-4%, however I know that mortgage interest is worked out differently to the way an ISA pays interest... So what's the best option? Putting the £5000 in an offset account and saving mortgage interest or putting into an ISA and gaining interest?

Before anyone suggests it, no I'm not going to buy a new bike....

Gizmo_

I'd pay off the mortgage if I were you. Sad and boring I know, but look at it this way: if interest rates start rising, you will have £5k for them to start rising on.

If you need the cash back out again, you can always release a bit from the mortgage and you're no worse off.

EKE_38BPM

Give it to me and I promise to buy you a pint of beer every time I see you.

And by beer, I mean tap water.

And by pint, I mean a glass.

And by promise, I mean might.

Buy a bike.

cyclingprop

Your mortgage interest rate is *almost* certainly higher than the return you would earn in an ISA, so it is likely to be more expensive for you in the long run to hold it in an ISA than to pay off your mortgage. Simples.

colonelkurtz

there is a difference in accrual but it is subtle and normally the difference between APR & AER (one is compound the other isn't) or whether the balance is worked out daily, monthly etc etc. Either way there is a clear spread here - 5000 at 1.5% against your mortgage saves you £6.25 pcm, 5000 saved tax free at 3% accrues £12.50 pcm - the nuances won't bridge that gap - ISA works out better and also means you have access to the cash (cos your mortgage rate is low & won't be able to borrow at 1.5% anywhere if you need it in the future)

daviesee

If there is a chance of needing access to the cash - ISA
If not - Mortgage.

Actually here is a slightly alternate plan.

Put it towards the mortgage. This will reduce your payments but instead of reducing your payments, reduce your term and keep the same(ish) payments. You will be amazed at how much that can save over the term.

dhope

At the moment I'd pay off a mortgage.

Currently I'm saving rather than paying off debts but then that's because my debts are only student loans and the savings will help when I need to get a mortgage (I guess I'm paying off my mortgage in a sense, before I have the mortgage)

Sharkyssurfers

hows about halving 2500 for mortgage and 2500 for isa isa baby, that way you will get some return when you need it for a new bike

Headhuunter

So confusing! So cyclingprop you're saying that mortgage interest accrues faster than ISA interest yet colonelkurtz is saying no that I would save more in the ISA... Can anyone shed any more light?

colonelkurtz

I think the point is that if your on a repayment mortgage your interest payments go down faster as you're repaying the capital every month. If you simply pay off 5000 on the mortgage, then the capital is reduced by that on a one off basis, and that's your saving the interest against that portion. Granted there is less capital to pay off and you will reduce your net payments faster but I'm not convinced it could possibly bridge the 1.5% to 3% spread on the rates. Entirely happy to concede I'm wrong if someone has a better answer - I often am!

TheStone

ISA works out better, but both interests so small, the difference is tiny.
A cab ride to visit bank and a couple of pints after would eat most of it up.

mtb-idle

If the question is do you earn more interest in the ISA than you are paying on the mortgage then Colonel Kurtz is right; smells like victory for the ISA (and yes, I know it wasn't Kurtz who said that).

If the question is what is the right thing to do then only you can decide that. Me personally i am paying my mortgage off quicker by about £300 per month even though i could invest that money and earn a better rate of interest because my priority is to clear my mortgage and then i can retire although that's probably because I'm a lot older than most/many/none/some of you (delete as applicable).

cyclingprop

http://www.moneysavingexpert.com/mortga ... vs-savings

See full guide here

rolf_f

Broadly speaking, in most cases, saving money whilst owing money is bonkers. You aren't really saving money at all but increasing your debt pointlessly.

I ploughed all my spare cash into mortgage overpayments. I had a mortgage of £60k and I think it cost me about £90k to pay it off early. This was against an expected £140k for paying it off over 25 years. You'd need a lot of Isas to earn 50 grand. I left a few quid owing on the mortgage just in case but that is just against the capital and it costs me about £5 a month!

Even 5k makes a difference (particularly when you are still mostly paying off the interest) - there are plenty of on line calculators that will help you find out what the real value of an over-payment is.

mtb-idle

Rolf F wrote:

Broadly speaking, in most cases, saving money whilst owing money is bonkers. You aren't really saving money at all but increasing your debt pointlessly.

that's not necessarily true. The only way the debt is increasing is due to the interest which has been factored in to the amount and term of your repayments already.

Saving money and repaying a loan are not mutually incompatible

rolf_f

MTB-Idle wrote:

Rolf F wrote:

Broadly speaking, in most cases, saving money whilst owing money is bonkers. You aren't really saving money at all but increasing your debt pointlessly.

that's not necessarily true. The only way the debt is increasing is due to the interest which has been factored in to the amount and term of your repayments already.

Saving money and repaying a loan are not mutually incompatible

You're increasing your debt by not having paid part of it off with money you already have. I probably didn't phrase that as well as I could have but what I meant is that if you have a 50k debt and 50k savings you are increasing your debt pointlessly as you don't actually need to have a debt at all!

TheStone

Rolf F wrote:

You're increasing your debt by not having paid part of it off with money you already have. I probably didn't phrase that as well as I could have but what I meant is that if you have a 50k debt and 50k savings you are increasing your debt pointlessly as you don't actually need to have a debt at all!

But if the interest you receive on your savings is more than what you pay on your debt, then why would you pay it off?

It's a situation that should never happen, but two governments and one inept central bank have made a total mess of things.

mtb-idle

Rolf F wrote:

MTB-Idle wrote:

Rolf F wrote:

Broadly speaking, in most cases, saving money whilst owing money is bonkers. You aren't really saving money at all but increasing your debt pointlessly.

that's not necessarily true. The only way the debt is increasing is due to the interest which has been factored in to the amount and term of your repayments already.

Saving money and repaying a loan are not mutually incompatible

You're increasing your debt by not having paid part of it off with money you already have. I probably didn't phrase that as well as I could have but what I meant is that if you have a 50k debt and 50k savings you are increasing your debt pointlessly as you don't actually need to have a debt at all!

If you use your 50k savings to pay off your 50k debt you are of course ending up with nothing (except perhaps an unencumbered house) but how useful is that when you need to pay for food/living expenses?

what the IFA's would have you believe you need to do is to actually take on more debt so that you can leverage (weasel word) that debt by investing it and boosting investment income at the same time as growing a portfolio.

that of course may be what got us into this mess in the first place but hey ho.

mitchell_inman

Would using the £5k to pay off the mortgage leave you with no savings you can access quickly?

If the answer is yes, then I'd say keep the cash in savings. These days, you can't always guarantee being able to draw down the money from your mortgage again, if you need it.

Headhuunter

TheStone wrote:

Rolf F wrote:

You're increasing your debt by not having paid part of it off with money you already have. I probably didn't phrase that as well as I could have but what I meant is that if you have a 50k debt and 50k savings you are increasing your debt pointlessly as you don't actually need to have a debt at all!

But if the interest you receive on your savings is more than what you pay on your debt, then why would you pay it off?

It's a situation that should never happen, but two governments and one inept central bank have made a total mess of things.

Exactly! This is my question! There's no point paying off the debt if it's accruing interest more slowly than I can earn interest somewhere else. It's not just a given that you should mindlessly pay off debt when you can get an arbitrage between what you pay in interest and what you earn somewhere else....

Headhuunter

mitchell_inman wrote:

Would using the £5k to pay off the mortgage leave you with no savings you can access quickly?

If the answer is yes, then I'd say keep the cash in savings. These days, you can't always guarantee being able to draw down the money from your mortgage again, if you need it.

Perhaps I should be clearer, I would be putting the money into an offset account attached to the mortgage so it I would not be paying mortgage interest on the £5000 but it would remain fully and instantly accessible...

Headhuunter

cyclingprop wrote:

http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings

See full guide here

Looks interesting, will have to have a read....

mitchell_inman

Headhuunter wrote:

Perhaps I should be clearer, I would be putting the money into an offset account attached to the mortgage so it I would not be paying mortgage interest on the £5000 but it would remain fully and instantly accessible...

Perhaps I should have read it properly :oops:

squired

If we were to end up in a 2008-like situation I would want to have access to cash should I lose my job. So given the current economic situation I'd be building up some accessible cash just in case. Paying off £5k now is great, but if you were to suddenly have no income and couldn't cover the mortgage the bank probably wouldn't care that you paid off £5k extra a few months ago.

Headhuunter

squired wrote:

If we were to end up in a 2008-like situation I would want to have access to cash should I lose my job. So given the current economic situation I'd be building up some accessible cash just in case. Paying off £5k now is great, but if you were to suddenly have no income and couldn't cover the mortgage the bank probably wouldn't care that you paid off £5k extra a few months ago.

As I said above, the money remains completely accessible in an offset account.I'm not actually paying off the mortgage but I don't pay interest on the offset amount

jzed

HH - stick the money in an easy access ISA. Like others have said if you need it you can get your hands on it. If your earned 3.5% on the £5k in the ISA and paying 1.5% on the £5k not paid off on the mortgage, then you're making 2%.

It might only be £100 a year but its better in your pocket.

EKE_38BPM

I still think he should give it to me.

Or buy a new bike.

Headhuunter

EKE_38BPM wrote:

I still think he should give it to me.

Or buy a new bike.

Thanks for the offer but I'll let you know...

Butterd2

Headhuunter wrote:

Exactly! This is my question! There's no point paying off the debt if it's accruing interest more slowly than I can earn interest somewhere else. It's not just a given that you should mindlessly pay off debt when you can get an arbitrage between what you pay in interest and what you earn somewhere else....

Look at it this way. If that were possible then you should increase your mortgage and invest the extra money in ISA's pocketing the difference in interest as profit. Sounds unlikely to me.

Best solution is an offset mortgage that way use reduce interest payments but can always access the money quickly if you need it. You cannot take money out and then put it back in the ISA later.

Anyway, hope you are well, long time no see.

daxplusplus

Do both!

Get a mortgage where you can link your ISAs to your Mortgage. Put your money in the ISA. You get to keep your ISA allowance (and can access the money quickly if your really have to) but in the meantime it's offset against your mortgage.

Maximum flexibility.

daxplusplus

Oops - offset already offered as an option. Oh well. It is a good idea - probably the only downside is that you have to have strong will power.