Should I take advantage of my Isa financial savings to repay my mortgage when my repair ends?

My mortgage is fixed at 1.39 per cent until May 2026 with a £105,000 balance 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 stocks and £25,000 in cash savings for emergencies and other short-term goals.

With interest rates high and not looking like they are coming down any time soon, I’m considering using my Isa investments to pay off my mortgage when my current deal ends. I am also considering transferring my cash savings to a fixed-term cash Isa for the next two years.

I have an annual household income of £50,000, so any increase in mortgage repayments after May 2026 will have some impact on our budgeting.

Are there any other options that would be better – such as partial overpayments on the mortgage, an offset mortgage or just remortgaging and accepting the higher repayments so I preserve my Isa savings?

Many borrowers coming to the end of a cheaper fixed rate deals and needing to remortgage could be in for a shock

Helen Kirrane of This is Money replies: Today’s mortgage rates are much higher than many borrowers have been used to. 

Last week, the Bank of England decided to hold the base-rate at 5.25 per cent for the seventh time in a row since September 2023. In that time, average mortgage rates have hovered a touch above that level. 

Homeowners rolling off deals of 2 per cent or less, such as yourself, now face rates that are around 5 per cent or more. 

The typical two-year fixed mortgage rate is 5.96 per cent, according to rates monitor Moneyfacts Compare, while the average five-year fix is 5.53 per cent.

The question for those with a remortgage deadline looming, like yourself, is when might rates go down. 
At the moment, markets are pricing in one or two interest rate cuts in 2024, with the first coming in either August or September. 

With your fixed rate ending in 2026, you do still have time on your side to decide what to do when your fixed deal ends. 

There are several options, including as you say cashing out some of your investments and savings in order to lessen the pain of higher mortgage payments.  

For expert advice, we spoke to David Hollingworth, associate director at L&C Mortgages. 

David Hollingworth, associate director at L&C Mortgages: It makes sense to think about your strategy for when your mortgage deal ends

David Hollingworth replies: You are clearly still benefiting from a low fixed rate that you must have locked in prior to the interest rate rises that commenced at the back end of 2021. 

That has protected you from the higher rate environment, and you still have the best part of two years left to run on that fix.

It makes sense to think about your strategy for when the deal ends, whilst making the most of the remaining period of the fixed rate to prepare for higher rates. 

Some of the lowest 5-year fixed rates without a fee are now available just a touch below 4.6 per cent. Avoiding a big fee will likely make sense for the size of mortgage you have.

In terms of what your new mortgage payments could look like, a £105,000 repayment mortgage over 12 years at 1.39 per cent will cost £792 per month whereas the same mortgage at 4.6 per cent would cost £950 per month.

Of course, the mortgage will reduce further over the course of the next couple of years and we don’t know where interest rates may be sitting as the end of your deal approaches. 

You could consider overpaying if you are able to in the meantime or putting money away in a savings account to build a lump sum that could cut the mortgage balance when your deal ends.

Most lenders will allow you to overpay a proportion of the mortgage, typically up to 10 per cent per annum, without incurring an early repayment charge. 

As you have identified it’s possible to earn a higher rate of interest on savings that you are currently paying on the mortgage, which could give a better return than overpaying.

What you can’t directly compare is the potential return on your equity holdings, so it’s not possible to know whether liquidating those to repay the mortgage would ultimately pay off. 

A big part of the decision will depend on what other savings and pension you may have. If these investments were earmarked for the longer term you may want to think carefully about whether cashing them in entirely could be putting all your eggs in one basket.

You should keep hold of a cash sum for an emergency fund as well, rather than ploughing all your cash into 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 the cash. 

The downside is that offset deals will typically carry a higher interest rate than a standard deal, so you need to be sure you will use the offset adequately to make up the difference.

Trying to save or overpay now will help you adapt to when rates will increase but also help you reduce the mortgage balance more sharply when the low fix ends. 

If rates have also come down by the time you need to remortgage, you may find you are also in a better place but there’s clearly no guarantees of that.

Helen Kirrane replies: As you say, you could build up some of your cash savings to potentially use when your fix ends by putting them in a fixed-rate Isa for two years.

The very best two-year cash Isas are paying around 4.6 per cent, which is significantly higher than two years ago when the best two-year fix paid around 2.9 per cent.

United Trust Bank’s two-year Isa paying 4.67 per cent is your best bet if you are looking 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 in from existing Isas, but it is not a flexible Isa so you will not be able to dip into the pot and replace funds within the same year without impacting your £20,000 Isa limit.

If you were to put £20,000 of your cash savings into this Isa, which is the maximum you can put in 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 would not have to pay any tax on the interest.