ISA Mortgages

What are ISA mortgages?

When looking for a way to pay off the outstanding capital on an interest-only mortgage, you have quite a few options. These include endowment mortgages, pension mortgages, and also ISAs.

ISAs replaced PEPs as ways of making an income tax-free. ISAs are Individual Savings Accounts and are now frequently used as a way of backing an interest-only mortgage. The government allows you to put up to £7000 away in this ISA and there are two types of ISA - maxi and mini.

The rules are actually a little bit complicated, as you are allowed to get one maxi ISA or up to 3 mini ISAs in one tax year. A maxi ISA is generally a stock market-only account and these are likely to have the capacity to be used as the savings vehicle to back up a mortgage. You can also choose between three different types of ISA, a stocks and shares ISA, a cash ISA and a life insurance ISA.

Every month, with an ISA mortgage you have to meet the cost of interest on the loan, you then take out the ISA to build up a fund which will hopefully pay back your mortgage at the end of the term. Due to the fall in the stock market, ISAs are actually quite cheap at the moment, as you are paying less for the units that you are funding.

Out of all the investment vehicles, ISAs are the most flexible. You can't just stop paying into an endowment and start again, as you will be liable for penalty charges or you may lose money due to the charges at the start of your fund. With a pension mortgage, you can't access any of the fund until you are at least 50 years old. With ISAs, you can stop paying into them with little or no penalty charges.

You need to think about how much you like risk, and if you are happy not having the certainty that your mortgage will be paid off at the end of the term, then maybe an ISA mortgage is for you. If you don't like the risk then you should go for a repayment mortgage.

So, the advantage of the ISA mortgage is that you get good tax breaks on the income from them, which makes them more tax efficient than endowments. Should your investment grow fast you may be able to pay off your mortgage early. The flexibility is also a good thing, as you can stop and start contributions.

The biggest disadvantage is that you may not get enough funds to pay off your mortgage at the end of the term, and you should also bear in mind that ISAs could be abolished at any time.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2009

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