My mortgage is fixed at 1.39 per cent until May 2026 with a balance of £105,000 and a remaining term of 12 years. The house is worth around £500,000.
I also have £80,000 in a stocks and shares ISA, another £20,000 invested in some individual shares and £25,000 in cash savings for emergencies and other short-term goals.
With interest rates high and not looking like they’re going down anytime soon, I’m considering using my Isa investments to pay off my mortgage when my current deal ends. I’m also considering transferring my cash savings into a fixed-term cash Isa over the next two years.
I have an annual household income of £50,000 so any increase in mortgage payments after May 2026 will have some impact on our budget.
Are there other options that would be better, such as partial mortgage overpayments, an offset mortgage or simply remortgaging and taking higher payments to keep my Isa savings?
Many borrowers who reach the end of a cheaper fixed-rate deal and need to refinance their mortgage may be in for a surprise.
Helen Kirrane from This is Money responds: Current mortgage rates are much higher than many borrowers were accustomed to.
Last week, the Bank of England decided to keep the base rate at 5.25 per cent for the seventh consecutive time since September 2023. In that time, average mortgage rates have remained slightly above that level.
Homeowners paying 2 percent or less in interest, like you, now face rates of 5 percent or more.
The typical two-year fixed mortgage rate is 5.96 per cent, according to rate tracker Moneyfacts Compare, while the average five-year fixed rate is 5.53 per cent.
The question for those with a looming remortgage deadline, like you, is when rates might drop.
For now, markets are pricing in one or two interest rate cuts in 2024, the first of which will occur in August or September.
Since your fixed rate ends in 2026, you still have time on your side to decide what to do when your fixed offer ends.
There are several options, including, as you say, withdrawing some of your investments and savings to lessen the pain of higher mortgage payments.
For expert advice, we spoke to David Hollingworth, Associate Director, L&C Mortgages.
David Hollingworth, associate director at L&C Mortgages: It makes sense to think about your strategy for when your mortgage contract ends
David Hollingworth replies: Clearly you are still benefiting from a low fixed rate that you should have locked in before the interest rate hikes that began in late 2021.
That has protected it from the higher rate environment, and it still has nearly two years to implement that solution.
It makes sense to think about your strategy for when the deal ends, while making the most of the remaining fixed rate period to prepare for higher rates.
Some of the lowest no-fee 5-year fixed rates are now available at just under 4.6 percent. Avoiding a high fee likely makes sense for the size of the mortgage you have.
In terms of what your new mortgage payments might look like, a £105,000 mortgage repaid over 12 years at 1.39 per cent will cost £792 per month, while the same mortgage at 4.6 per cent would cost £950 per month.
It’s possible to get a higher interest rate on the savings you’re currently paying for your mortgage, which could give you a better return than overpaying.
Of course, the mortgage will be reduced further over the course of the next few years and we don’t know where interest rates will be as you near the end of your agreement.
You might consider paying extra if you can do so in the meantime or putting money away in a savings account to generate a lump sum that can reduce the mortgage balance when your deal ends.
Most lenders will allow you to overpay a proportion of the mortgage, usually up to 10 percent per year, without incurring a prepayment charge.
As you’ve identified, it’s possible to get a higher interest rate on the savings you’re currently paying into the mortgage, which could give you a better return than overpaying.
What can’t be directly compared is the potential return on your equity investments, so it’s not possible to know whether paying them off to pay off the mortgage would ultimately be worth it.
Much of the decision will depend on what other savings and pensions you may have. If these investments were intended for the long term, you might want to think carefully about whether cashing them out in full might be putting all your eggs in one basket.
You should also keep a sum of cash for an emergency fund, rather than investing all of your cash in the mortgage.
An offset mortgage could offer an option as it will reduce the interest payable on the mortgage but still leave easy access to cash.
The downside is that offset agreements typically have a higher interest rate than a standard agreement, so you need to make sure you use the offset appropriately to make up the difference.
Trying to save or overpay now will help you adjust when rates rise, but it will also help you reduce your mortgage balance more dramatically when the low lock-in period ends.
If rates have also come down by the time you need to remortgage, you may also be in a better place, but there are clearly no guarantees of that.
Helen Kirrane responds: As you say, you could build up some of your cash savings to potentially use when you finish your settlement by putting them into a fixed rate Isa for two years.
The best two-year cash Isas pay around 4.6 per cent, which is significantly higher than two years ago, when the best two-year solution paid around 2.9 per cent.
United Trust Bank’s two-year ISA paying 4.67 per cent is your best option if you want to park your cash for two years until your fixed-term mortgage ends.
The minimum amount needed to open this account is £5,000. It accepts transfers from existing ISAs, but it is not a flexible ISA, so you won’t be able to use the money and replace it in the same year without affecting your £20,000 ISA limit.
If you put £20,000 of your cash savings into this Isa, which is the maximum you can put into an Isa in a given tax year, after two years you would earn around £1,954.04 in interest.
As the savings would be held in an ISA, you wouldn’t have to pay any tax on the interest.
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