Does it make sense to use low interest savings to pay chunk off mortgage debt?

[curlywillow]

I can't decide what we should do with our savings/mortgage.

DH and I both have jobs with very little security. We are mid 40s. I am self employed and work is not easy to come by at the moment. My income is likely to be about 30% lower this year than it has been for the past couple of years. DH is a partner in a business and has had a 20% pay cut this year and things are likely to go in the same direction next year. In addition I am likely to need to take a couple of months off work shortly in connection with one of the DCs.

We have £220k left on the mortgage. It has five years left to run. Interest rate is 1.75% (tracker at 1.49 above base rate). We also have £75k in ISAs earning pittance in interest (0.9 percent) but of course once we take that money out we can't put it back in again. We currently pay circa £4k a month on the mortgage (it is an interest only mortgage but we overpay so that it is paid within the term)

Option 1 - leave the ISAs and continue to pay off the mortgage at the current rate. It will be gone within the 5 years but for those five years we will be paying a lot on the mortgage which is doable atm but will become more of a strain if income continues to fall. Plus we have no buffer if disaster hits and one of us is without income. Given that we are both self employed, our pensions are rubbish (no employer contribution) and so the ISAs were intended as additional retirement income.

Option 2 - use the £75k to pay off a chunk of the mortgage. This will significantly reduce the mortgage payment and free up some cash but leaves us with no savings, at least in the short term. On the one hand we can then build up the savings again with the money we have freed up, but on the other it leaves us exposed for a while. It seems silly though to have money sat in low interest ISAs when we have a mortgage debt with a higher interest rate.

Option 3 - use some of the isa money to pay off some of the mortgage.

House also has lots that needs doing. Bathroom needs replacing, we have some damp suddenly appeared in one room and the patio looks more like a jungle...

I'm going round in circles. WWYD?

I would:

Get the bathroom replaced - that should be under £10k

Get the damp checked out and respond accordingly.

Keep some amount of savings out of the mortgage in case of an emergency - car breaking down, boiler exploding, etc.

Then put the rest into the mortgage and remortgage at the same time - there are some very very low fixed rate deals out there at the moment.
If your income is going to be lower this year then you may want to keep the mortgage to be over the same numbers of years but just have the repayments to be lower.

Remortgaging might not be particularly easy given that we are both self employed. I'm also a little reluctant to lose our interest only mortgage since it gives us a lot of flexibility if the SHTF (we could reduce the monthly payment down to the £350 interest).

A vote for using most of the ISA money though...

So your mortgage is "optionally" interest-only, but you're actually paying more so that it will get paid off? That does sound useful in your situation.

Could you speak to your current provider about remortgaging? They know you are reliable and they may still have better deals than the one you have now. You don't have to go through with it but it'd be silly not to investigate with rates as low as they are.

Yes, it's a vote for using most of the ISA money.

Yes its interest only but because of that and our self employed status we were only given a ten year term on the mortgage. The very short term has made the monthly payments high because we chose to pay it as if it was a repayment mortgage in order that it is fully paid off by the end of the term.

Actually I guess we could potentially extend the term if they'd let us do that. That would also have the effect of reducing the monthly amount.

Couldn't you just remortgage at the end of your current ten years mortgage and continue paying it off? Why does it all have to be paid in 4 years?

If you haven't managed to pay it off that is.

FWIW I'd probably pay about £50k off the mortgage and keep the rest aside for incase your earnings take a turn for the worst

I would fix the bathroom and sort the damp. Then keep 15k in savings for emergencies. Then pay off a chunk of mortgage with the rest. You're currently losing more in interest on the mortgage than making interest on your ISAs, so long term it would be financially better to pay off more mortgage.

An alternative could be to take out the money to do the repairs in your house - it shouldn't cost 10k for the bathroom - I did 2 bathrooms and a toilet for not much more than that a few years ago.

Then, keep the rest in savings or see if you can shift it to something a bit better, continue overpaying the mortgage and then when the amount of the mortgage = the amount of savings pay it off completely - should be about 3 years? then you will have £4k to play with a month, half to start building up rainy day savings and half to pensions?

Always pay off the debt. It will also make you interest payments each month a lot lower so you can save more too. You need to check how much of the capital you can pay off in each FY without incurring penalties.

Keep six months expenses as savings - look at current accounts and challenger banks for slightly better rates, remember your personal savings tax allowance. Inflation is 2-3% so your money is disappearing in the isas. Look at pensions.

Pay off some of the mortgage. Fix the bathroom for a lot less than that, shop around. Clear the.patio yourself.

We can pay off unlimited amounts without any penalties. We would probably be better extending the term on the current mortgage since taking out another wouldn't necessarily be easy. Its less about taking longer to pay off the debt though and more about whether its silly to have that amount of money in savings when we have mortgage debt.

The inflation factor is relevant. We are effectively losing money on the savings. This is DH's biggest reason for thinking we should use the ISA money. I'm being more cautious (and slightly more optimistic) and thinking that we are losing the tax benefit of the money being in the isas. But maybe that isn't as relevant anymore with the tax free savings allowance?

exactly - the tax free savings allowance means cash ISAs aren't worth it . EXCEPT to build a tax free cushion for when the interest rates go up and the stock market down. This is currently looking years away.

so (FWIW) in your position, don't bother! With insecure jobs (like everyone) you need to be sure of the roof over your head.

I mean, some current banking accounts are paying more interest than ISAs at the moment. Santander, First Direct and they give you interest on any dds you have such as mortgage C tax and utilities. BUT you do need to pay in a certain amount into the account each month and I think there are upper limits to how much you can keep in there. So do look around.
Just a thought as you are s/e do you have an income protection plan?
A s/e friend had a terrible illness and she got everything covered for nearly a year.
We overpaid just £50 pcm extra on our mortgage and it cut the term by
2 years.

I wouldn't use the isa money to pay off the mortgage. If job security for both of you is shaky, and you are mid 40's (jobs harder to find in a year or two possibly if shtf) losing your jobs, it would be an impossible position to come back from. £75k in the bank gives a huge amount of security.

I'd replace bathroom and fix damp with it though.

Then save like crazy and review the situation annually.

What happens after the 5 years is up? Does the mortgage revert to svr? - I would assume this is what happens. ( Or would bank enforce a sale?)

After the five years the mortgage is repayable.

We are currently on track to do that, it's just really whether the isa money would be better off used to pay down some of the mortgage.

In your situation I would have opened 3 Santander current accounts - 1 joint, one in your name, one in partners - put 20k in each and gain 3% interest. Each would cost you £5 per month but It would be worth it. I would use the interest to overpay on the mortgage. I would then set up a regular saver each with somewhere like first direct and pay the max in each month again using the end of year interest to overpay.

However the Santander rate is about to decrease to 1.5% in November.

How about 20k in Santander -cash back on direct debits will probably cover the £5 charge. Overpay with rest (assuming no early repayment charges). Then keep paying mortgage at same rate whilst you can afford to.

I agree regarding the interest only - it gives you a buffer. Interest only works if you are in receipt of a variable income and are happy to overpay.

Paying 4k per month on £170k mortgage at 1.75% reduces term to just under 4 years. It would be close to 5k PM to reduce to 3 years.

Issue is that we don't get 3% interest since we are high earners. So the tax swallows it up anyway.

Ive just costed up the bathroom work at about £3k plus fitting (there are some issues with drainage and the septic tank). I think we will get that done and find someone to come out and look at the damp. Then we will probably use a chunk of what's left to pay some off the mortgage and keep some in savings.

If you are a 40% tax payer (salary between £43k and £150k ish) you will each have a £500 per year interest allowance.

It’s probably best to do a bit of both – paying off the mortgage will save a bit of money if you can’t beat the interest rate, but you lose flexibility.

If you hang on to the money, you can use it to pay bills including mortgage in lean times, pay for home improvements, buy cars instead of taking out more expensive finance, etc – if you pay off the mortgage, you can’t get it back without reborrowing, probably at a higher rate.

If you need to do essential home improvements, it’s worth using the money you have because if you have to borrow, it’s likely to cost more than your current borrowing –even your mortgage rate is probably unbeatable now.

The Santander interest rate is going down to 1.5% in a couple of months, so that option isn’t as attractive now. You can currently get 3-5% from Tesco, TSB and Lloyds, so it’s worth getting as many of those accounts as you can and filling them up as a cash/emergency fund.

Might premium bonds be also worthwhile? I know the effective interest rate is low, but there’s always a chance of a decent win, especially if you have a large holding.

As savings rates are unlikely to increase for the foreseable future, you are essentially losing money on your Isa's once you take inflation in to account.

Your top prioriy should be to fix the absolute minimum on your home as reasonably cheaply as possible.

.As you have no long term pension plan, l would use the 70 k left to buy a cheap Buy to let and keep it for retirement. Get loads of independant advice on Where/what to buy.

Then you can continue to overpay as much as possible on your mortgage, hopefully by retirement you will have paid off your mortgage and have a modest but reliable income from the BTL.

I believe paying off debt is the first priority, so pay off a big chunk of your mortgage

Fix the bathroom cheaply, but efficiently

Keep some savings for emergencies

Investigate getting a pension. I believe the government adds in some money

Interest rates are low now, but could rise
Currently poor rates for savers
Currently good rates for property buyers

Could you use the money to develop your current house? So add an extension or new kitchen or extra bedroom.
Then sell and release the profit. Transport mortgage to another property (preferably one that needs a bit of work) and do the same again and bring the mortgage right down by profits from sales.