The dangers of an Isa mortgage

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The dangers of an Isa mortgage

An Isa mortgage is a combination of an interest-only loan and an Isa, or individual savings account, which is the repayment vehicle for the capital portion of your debt (this is the amount you originally borrowed).

You could choose a cash or an equity Isa. (For more on this, see The two types of Isa mortgage.)

There are several reasons why most people would be better off with a straightforward repayment mortgage

... where the payments are calculated to clear the capital as well as the interest debt by the end of the mortgage term.

It's no cheaper than a repayment loan

The monthly payments on an interest-only loan may be significantly lower than for the equivalent repayment version, but add in the required payment to your Isa and you'll be no better off.

You need to be disciplined

To build up enough cash to clear the capital part of your debt, you will need to keep making the Isa payments no matter how much you would rather spend the cash on something else.

And if you succumb to temptation and use part of your accumulated Isa fund for some other purpose, you could find yourself in hot water if you don't have enough left to clear your loan at the end of the term.

There are limits on what you can save

You can save up to £3,000 a year, or £250 a month, in a cash Isa (rising to £3,600 in April 2008)

Or up to £7,000, or £583 a month, in a maxi equity Isa (rising to £7,200 in April 2008).

If you have a very large mortgage, this might not be enough to produce a lump sum that will clear it at the end of the term.

Equity Isas are very risky

Cash Isas are just as safe as any other bank or building society deposit accounts.

But equity Isas are stock market investments, so their value can fluctuate wildly.

You could do very well much better than with a cash Isa or you could end up with far less than you put in and be unable to pay off you debt.

A repayment mortgage, on the other hand, is risk free: as long as you keep up the monthly payments you will be debt-free by the end of it.

To read more on this subject please see the list below or your mortgage guide or your home buying guide

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