The term ISA is an abbreviation for Individual Savings Account. The ISA mortgage is a special type of interest-only mortgage. In interest-only mortgages, your monthly payment consists of the interest on the borrowed sum only, so at the end of the mortgage term your original debt remains the same. In the case of ISA mortgages, you open an individual savings account and deposit some cash or stock investments in the account, and the interest or profits gained help to pay the capital owed at the end of the mortgage term. Since you are not paying any part of the capital, your monthly payment is comparatively small and the compulsory savings you make are not too large, keeping the mortgage affordable. Depending upon the nature of savings, there are two types of ISA mortgage systems in UK; the cash ISA and the equity ISA.
In the cash ISA scheme, you can save up to Â£5,100 in your cash ISA in any tax year (i.e. April 6 to April 5). The cash ISA is just like any other savings accounts, with one exception. In the case of normal savings accounts, you need to pay 20% savings tax on the interest, but in a cash ISA, your interest is tax free. The interest on these savings varies between providers. If you are over 16, you can open such an account with any bank, building society or interest savings provider. Whatever the scheme and whoever the provider, the main aim is save some money to help you pay off your debt at the end of a mortgage term.
In the equity ISA scheme, you invest in company shares available on the stock markets. Investment in the stock market has always been risky and requires close monitoring, and recent developments in the financial markets do not make things much more appealing. Millions of investors have already lost lots of money in this market and lots of investment bankers have gone bankrupt. These kind of schemes do not presently leave much scope for safe investment, and the tax benefits are complex and less beneficial for the average person's needs. The equity investments are managed by the fund managers, who despite their best professional efforts, could leave you with considerably less money than you put in.
You can open either one mini equity ISA a year and invest up to Â£3,000 per year there, along with a cash ISA, or open a maxi equity ISA and invest up to Â£7,200 per year without the cash ISA.
These ISAs are basically your repayment vehicle, so to opt for this scheme you have to be a disciplined saver. Otherwise, it might lead you to more debt than you anticipated. You will have to overcome the temptation of withdrawing from this account for other purposes. The monthly payments on the loan may appear significantly lower than for the equivalent repayment version, but since you will have to pay an equivalent amount of cash into the ISA, it does not make things much different. Another problem is that the amount saved often falls short of the amount needed to pay off the full debt.
Author Pedro Guineavilledate added 2009-09-02 10:25:40