ISA Mortgage

• An ISA mortgage is an interest only mortgage combined with a tax-efficient investment (the ISA policy)
• An interest only loan is taken out and you pay regular savings into an Individual Savings Accounts or ISA for short
• The investment will hopefully grow over time and this will be used to pay back the principal of the mortgage loan
• ISAs can be invested in the stockmarket, bonds, deposit account etc with the majority of people investing in the stockmarket for the long term, ie 5-20 years

ISA mortgages during times of booming investments and rising stockmarkets are obviously very advantageous. But because the returns on the ISA can never be properly budgeted, ISA mortgages remain generally for the more sophisticated borrower, or at least one who has access to good financial advice.

While most people do invest their ISA money in the stockmarket they generally operate a prudent and cautious approach towards the shares bought. For example buying very volatile hi-tech internet stocks which have the potential to double and triple in value as well as fall by 50%-90%, are perceived as the wrong kind. Large corporations such as those found in the FTSE 100 index are normally the stocks of choice. Remember, the ISA mortgage holder is looking for compounded gains over a multi-year period, and the large established brand name companies have the best chance of delivering these returns.

The question of 'is an ISA mortgage better than a more traditional mortgage' can unfortunately only be answered with hindsight.

• If one were to take out an ISA mortgage, invest capital into the stockmarket and the stockmarket outperforms over a period of many years then an ISA mortgage would clearly be the best choice
• But if the stockmarket 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

Advantages of ISA Mortgages

• Flexible - You can stop paying into your ISA or withdraw your savings at anytime
• Investments - You choose where to invest your money, stockmarket, bonds, life assurance etc or create a mixture of investments
• Tax-Efficient - ISAs are free from personal taxes and no tax on withdrawals. This is an excellent advantage for those looking to compound gains over many years

Disadvantages of ISA Mortgages

• 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 stockmarkets and other financial markets

Repayment Mortgages

• Repayment mortgages are the simplest form of mortgage
• Every month a single payment is made which takes into account the interest charge and a part payment of the overall loan
• If you therefore keep up your monthly payments your mortgage will be paid back 100% when the term is up
• In the early years, a greater proportion of the payment is used to repay interest on the mortgage loan, while in later years an increasing percentage goes towards capital

There are normally always special offers available with a repayment type mortgage as well as flexible terms available such as the ability to make lump sum contributions and even early payoff without penalties.