What is ISA Mortgage?
ISA stands for Individual Savings Accounts and is mostly applied in the UK. It is a very flexible investment unlike an Endowment which you cannot stop paying into without incurring penalty charges. With a pension mortgage you will not be able to pay off the mortgage until you have retired which could be at the age of 50 or older. An ISA allows you to stop and start payments with little or no penalty charges. Every month, with an ISA mortgage you will be expected to pay the interest on the loan monthly, then you take out the ISA to build up a fund which will pay back your mortgage at the end of your mortgage term. An ISA comes with tax benefits as well as the savings that you accumulate - they are free from income tax or capital gains tax. Your investment can grow quite rapidly and you’ll be able to pay off your mortgage earlier than you first thought.
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 money 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 a form of interest only mortgage that heavily relies on the stock market and you are not guaranteed to make enough funds to pay off your mortgage.
It’s necessary to mention that ISA mortgages during times of booming investments and rising stock markets are obviously very advantageous. Nevertheless, ISA mortgages remain generally for the more sophisticated borrower or at least for the one who has access to good financial advice because the returns on the ISA can never be properly budgeted.
Is an ISA mortgage actually better than a more traditional mortgage? Well, if you were to take out an ISA mortgage, invest capital into the stock market and the stock market outperforms over a period of many years then an ISA mortgage would clearly be the best choice. But if the stock market or even the individual stocks that were invested in traded poorly over a multi-year period then it’s likely that a more traditional mortgage would have been the better.
Still there are some advantages and disadvantages of ISA Mortgages. Among the advantages are the following points: Flexibility - You can stop paying into your ISA or withdraw your savings at anytime; Investments - You choose where to invest your money: stock market, bonds, life assurance or create a mixture of investments; Tax-Efficiency - ISAs are free from personal taxes and no tax on withdrawals. This is an excellent advantage for those who want to compound gains over many years. And the disadvantages include Capped Investment - Due to UK tax laws the maximum that one can invest in an ISA each tax year until 2005-2006 is £7,000. These limits are likely to change in the future. People who want to borrow a large sum will find it impossible with an ISA mortgage; Investment Risk - Apart from cash there is no guarantee that your investments will either go up or go up according to your budget plans. There is even the risk that the investments will go down over a period of time. As mentioned before perhaps ISA mortgages are best suited to those with experience of investing in the stock markets and other financial markets.