ISA Mortgages

What is an ISA mortgage?
ISA; Individual Savings Account - a tax efficient savings plan in which you can save a maximum of £7,200 each year. You can choose to invest your savings in a wide range of investments ranging from zero risk (building society accounts) to high risk (shares in companies). A low risk approach is consistent with a lower, steadier rate of return. Conversely, higher risk may return higher rewards but the journey could be quite rocky.

When using an ISA to repay a mortgage you will only pay interest to the lender, therefore you will always owe the original amount borrowed and it is the ISA that is used to repay the mortgage at some point in the future, this could be sooner or later than expected depending on how well your investment performs.

How much does an ISA cost?
The amount that you need to invest is calculated according to an assumed growth rate. It has to be assumed because we can never know from the outset what rate of return your investment will actually achieve. We know the amount of money required at certain point in the future (say £100,000 in 25 years time), we also know how much the investment provider will charge. Taking this into account it is a simple calculation to determine the amount that should be saved each month.

Why give up the certainty that a repayment mortgage provides over uncertainty of an ISA mortgage?

Buy to Let Mortgages: This type of mortgage is best arranged on an interest only basis to maximise the tax breaks for offsetting rental income against mortgage payments (in other words, you don't want to be pay off the mortgage until the end). An ISA is an ideal place to save the capital to repay the mortgage and it could also be a useful source for capital to purchase another buy to let property in the future.

Residential Mortgages: If the ISA investment return is a good margin greater than the interest rate charged on the mortgage then the ISA route would enable you to pay off your mortgage sooner. However, there is no guarantee provided for the investment return so this is very much a gamble

Some of the best performing ISA funds regularly return in excess of 15%pa but they can fall in value. Pick the wrong fund and you may lose money. If you don't monitor the performance regularly you could be faced with a significant shortfall when you come to pay off your mortgage. This is likely to coincide with the end of your working life when it could be difficult to pull back any shortfall.

If you choose the ISA route make sure you monitor fund performance every few years and remember THE VALUE OF INVESTMENTS CAN GO DOWN AS WELL AS UP AND YOU MAY GET BACK LESS THAN YOU INVESTED

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