ISA Mortgages

An ISA mortgage is a type of interest-only mortgage whereby an Individual Savings Account (ISA) is used to repay the amount borrowed at the end of the mortgage term. You pay regular deposits into the ISA, which hopefully grow in value over time.

Since you do not actually repay any of the loan amount until the end of the mortgage term, you must be disciplined enough to regularly deposit funds into the ISA, so that you have enough money to repay your debt when the time comes. Although interest-only mortgages are generally less expensive than standard repayment mortgages, you will probably need to invest this saving in your ISA to ensure that you do not face a shortfall at the end of the mortgage.

ISAs are tax-free savings or investment options, which means that any income you receive from these savings, such as interest earned, is added to the balance without tax deduction. There are two types of ISA: the Cash ISA and the Stocks and Shares ISA. Which one you choose will affect the potential growth of your investment and the risk of you losing out financially.

A Cash ISA is a low-risk savings option where interest is paid tax-free into the account each month, or at the end of the financial year. These accounts are widely available from banks, building societies and online providers, but the interest rate, which determines how much interest you earn each month, varies considerably between providers. Ensure you shop around to find the best deal: these change frequently, as providers compete for new customers.

There is an annual limit to the amount you can deposit in a Cash ISA. As of April 2008, this is £3,600 per year. If your mortgage is very large, you may find this is not sufficient to repay your loan at the end of the mortgage term.

The second type of ISA is a Stocks and Shares ISA. This has a larger annual investment limit (£7,200 as of April 2008), but its success is largely based on the performance of the stock market, which means that your investment could reduce in value if the economy falls into recession, or the companies you choose to invest in struggle to make profits. This means that although the potential increase in the value of your investment is better than that of a Cash ISA, you could end up losing money if your investment performs poorly.

If you are worried about the risk involved with your investment, you may find that a repayment mortgage offers you greater peace of mind, since at the end of the term, you are guaranteed to have paid off your loan, as long as you have made all the repayments on time and in full.