UK ISA Mortgage

If you take out an interest only mortgage, you still have to find some way of paying off the capital that you have borrowed at the end of the mortgage term. One of the options you could use to do this is an ISA.

ISA (Individual Savings Account) mortgages work on the same principle as endowments: you invest in a fund which is expected to build up enough cash to repay the mortgage at the end of the loan term, meanwhile you pay back only the interest incurred on a mortgage.

An ISA is a very flexible investment vehicle unlike an Endowment which you cannot stop paying into without incurring penalty charges.. They carry the same investment risk as endowments. If the stock market does not grow rapidly enough, homebuyers will be forced to cough up extra money to make up the shortfall. An ISA comes with tax benefits too as the savings that you accumulate are free from income tax or capital gains tax. Your investment could grow quite rapidly resulting in you being able to pay off your mortgage earlier than you had first hoped for.

An ISA mortgage seller will probably urge you to add on life insurance and critical illness premiums to your mortgage. These can add on a considerable amount to your mortgage.

You cannot assign an ISA to a lender; it is, therefore, very easy to stop payments into the plan without the mortgage lender knowing. An ISA allows you to stop and start payments with little or no penalty charges. If you were unable to make full payments your mortgage lender may not know and the underpayment may not emerge until the end of the term of the mortgage, when the debt outstanding is so large that you will not have funds to pay it. The consequence could be the loss of the family home.

ISA mortgages do have advantages over endowments. They are tax-free, so the investment will grow more rapidly than an endowment would. They have lower charges, typically 5% on each premium plus a 0.5% annual charge on the fund, and they can be better value than an endowment if they are cashed in early.

There are two types of ISA, a maxi and a mini. The government will allow you to put £7000 a year into an ISA used to back up a mortgage. The Maxi ISA is usually a stock market account and is more likely to generate the amount of money required to pay off the capital on your mortgage. You are allowed one maxi and up to three mini ISA’s.
ISA’s can be viewed as cheap when the stock market has fallen, because you have to pay less for the units that you are funding.

However you should consider the fact that any sort of interest only mortgage carries more risks than the traditional repayment mortgage. An ISA is remember a form of interest only mortgage, relying heavily on the investment growth at the end of the term.

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