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What is a ISA Mortgage? It replaced the PEP mortgage and
is similar in structure to an endowment or pension mortgage. You
take out an ISA and your monthly contributions to the tax-free ISA
savings scheme should grow over the mortgage term to enable you
to repay your mortgage capital debt. You repay the interest on the
amount borrowed on a monthly basis.
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How do I select the best ISA mortgage? If you tell a mortgage
lender you want an interest-only loan, many will try to sell you
their own ISA or endowment. The Sunday Times states that "the average
building society might do a good line in home loans, but you will
invariably get superior investment expertise from a specialist fund
manager." They add "the range of ISAs is baffling, but you need
a scheme that invests in stocks and shares through a pooled investment
such as a unit trust. A cash ISA is not suitable for a mortgage."
The Sunday Times says that advisers recommend you invest with three
different fund managers with a proven track record over the mortgage
term. You must also be willing to monitor the value of your ISAs
to ensure they are on track to pay off the home loan and be ready
to transfer to another fund manager if performance declines.
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Are ISA home loans risky? The Sunday Times says you should
be willing to take some investment risk. Towards the end of the
term, it is crucial to move into lower risk investments, such as
corporate bonds, to guard against a stock market crash at the 11th
hour.
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What are the tax advantages? You do not have to pay income
tax or capital gains tax on your ISA investment.
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Does an ISA beat an endowment loan? ISA home loans are more
flexible. They do not have a fixed life and you can withdraw some
of your investment to repay a chunk of your loan early. You can
also usually stop, start, and vary contributions without penalty.
However, with-profit endowments are less volatile than an equity
ISA. Ray Boulger of John Charcol, a mortgage broker was quoted as
saying: "Endowments smooth out the ups and downs of the stock market
and can be better suited to the more cautious investor."
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Is an ISA cheaper than an endowment? The charging structures
make it difficult to compare costs. If you keep the two for the
full 25 year term, the Sunday Times says there is probably not much
in it. However, endowment policies usually load the charges in the
first few years so if you have to cash in early, you will probably
lose out.
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Would a repayment loan be better? With a repayment mortgage
you pay off capital and interest each month. You know that the debt
will be paid off at the end of the term. Neither endowments nor
ISAs can offer you the same security. In addition, the Government
can only guarantee that ISAs will exist until 2009.
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Do I still need life assurance? If you have no dependants
and your employer's death in service benefit will cover the mortgage
if you die suddenly, you may not need to take out a separate policy.
Some lenders, however, will insist that you take out life assurance.
You may also need extra cover if you have a family.
