ISA Mortgage
(Individual Savings Account Plan)
A mortgage which is worth considering is the interest only mortgage called ISA Mortgage. This is a tax free and tax efficient saving scheme introduced by the government. In effect, it is like taking out an interest only mortgage and saving into an ISA Plan to build up funds to repay the borrowed capital.
In an ISA mortgage, an ISA or individual savings account is used to save the money to pay off the interest only part of the mortgage. Interest only mortgages are not particular about the source of payment and can be paid through any sources. An ISA or a series of ISA's are there to repay the principal mortgage amount.
An ISA mortgage works similarly to an endowment mortgages. Using an ISA to pay off your mortgage makes a lot of sense but involves a lot of risks due to capital savings. If you can not save enough or make capital investments then this type of mortgage is not an option
It is therefore paramount to ascertain the risks and the benefits of choosing to save via an ISA to repay your mortgage.
A Background to ISA Mortgages
Endowments have let down many home buyers by failing to pay off mortgages. When home buyers began rejecting endowments, due to the negative publicity from poor performance, lenders needed a new product to boost their mortgage sales.
Lenders began convincing home buyers that ISA investments are the answer. The sales strategy was to emphasize that ISA Mortgages cannot suffer the same fate such as endowments since charges were much flexible and lower.
Is an ISA Mortgage Best for You?
Mortgage lenders used the same sales pitch used by salesmen on endowments mortgage a decade before. The sales pitch used was that the investment has the possibility to exceed expectations and provide you with a lump sum at the end. There are also a few financial advisers who claim that ISA Mortgages would be acceptable for people who may move house within the first few years.
In the first years of a mortgage, very little debt is cleared. Therefore, an ISA Mortgage backed by an interest only loan is better. However, this is only true if the mortgage is restructured and extended to 25 years when you move.
Benefits Of An ISA Mortgage
Another benefit of an ISA mortgage is any profits you make are free of capital gains and income tax. Unlike with interest only mortgages where the returns of the money saved herein are subject to capital gains tax and income tax. ISA Mortgages can also be much cheaper than an endowment mortgage. With good investment returns or profits, the mortgage loan can be repaid sooner than anticipated and with a lower outlay.
ISA Mortgages give you the option of investing in the stock market and life insurance policies like endowments as well as cash, and all returns remain tax free. An ISA Mortgage also allows flexibility because you can discontinue and commence payments to your ISA whenever you please.
Choosing an ISA plan for your ISA mortgage is not easy, so it is important to seek advice from an Independent Financial Adviser or mortgage broker.
