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I currently have an offset mortgage and also ISA stocks and shares account. The mortgage is only small as the property wasn't expensive and I placed a large deposit (40% of property) down.

I have been able to make over-payments into the offset to benefit from the interest savings (inverse of interest on savings). The 2 year fixed low interest rate has expired and is now around 4.8% (from 2.7%). I haven't re-mortgaged as yet.

My plan was to overpay into the mortgage up to the point where a year is left on the mortgage and keep it that way. So I would remove a year's worth of offset savings and place into the ISA each year, whilst dripping the mortgage payments in.

The reason for doing this would be to keep liquidity if I decided to upgrade to a larger property or some other large expense whilst balancing risk of stock/shares investment. Also, early payment of the mortgage would incur a fee (albeit small in relation to the mortgage).

Although the offset is reducing the interest on the mortgage, is prolonging the loan/debt a bad idea on 4.8%? Instead should I pay the mortgage off early and then use what would be freed up mortgage payments into the ISA?

The problem I see with this option is that you don't then benefit from the growth of the ISA over time.

Effectively I'm comparing ISA growth with Offset mortgage savings benefit with the balance of having liquidity. I'd also like to keep the ISA savings without drawing upon it to sustain the leveraged growth.

Any advise appreciated.

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I am not a Financial Advisor, but I an tell you what I did in exactly this situation - which is pretty much what you are proposing.

I put money into the offset savings account until I had only a small amount of mortgage "balance" left (less than a year's worth of mortgage payments), then I set it up so that each month I did the transfer from the offset savings pot into the mortgage itself. This depleted the offset savings in line with the mortgage debt, and the interest on the two balanced out almost to zero. This was self-sustaining and meant that I kept the same margin owing over time (i.e. if I was in this situation for 5 years, for the whole 5 years I would effectively have 1 year remaining on the mortgage). Meanwhile, since I now didn't have any mortgage outgoings from my regular income, I put any spare money into ISA savings. No need to withdraw money from the mortgage to move to the ISA.

The benefits of this (as opposed to just paying off the damn mortgage already) were that I kept the full liquidity of the mortgage amount - I could withdraw all the offset savings pot if I wanted to, although I would then have to have funded the mortgage payments differently, and as that liquidity went down over time I was building up other savings in parallel.

It worked well for me. It almost doesn't matter what the offset mortgage rate is since you are effectively paying it off by keeping the offset savings pot so high.

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  • Seems like a great idea to me. I asked a friend who is a mortgage adviser and he seemed to think the 4.8% interest rate was expensive & not worth it. He recommended a 'normal' mortgage at a much lower rate, and just save as normal. I need to take into account fees etc. What do you think?
    – jaffa
    Feb 14, 2015 at 17:55
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    Well, you could make yourself a spreadsheet showing what you are saving / what the debt is costing etc. in the different scenarios. That's what I did and I found the offset rate was almost irrelevant because you are keeping the savings pot so full, the only purpose of the account is to keep the liquidity of that money. He is right that offset rates are higher in general, but in the specific case that the savings pot is full that just doesn't matter.
    – Vicky
    Feb 15, 2015 at 19:34
  • Indeed, if you have enough savings to pay for most of the mortgage, then the rate is relevant if you suddenly need some of the money - compare it to a credit card or personal loan rate. In that case 4.8% is not bad.
    – nsandersen
    May 8, 2016 at 9:09

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