Repayment Options
ISA mortgages
| Organising your ISA
| Advantages | Disadvantages
Disadvantages Of ISA Mortgages
Aside from the general points that relate to most interest-only
products, there are a few added features of ISA mortgages
which may influence your decision on whether to use one
as a repayment vehicle for your mortgage.
The limits on your annual contributions can make it difficult
to pay back your loan. These limits are currently set at
£7000, so you would have to rely on good investment performance
to repay a loan of over £250,000 within a twenty-five year
period. You can invest more than your individual ISA contribution
limit, but anything over the limit will be outside the tax-free
wrapper. This is less of an issue for couples, as they are
each allowed to invest their individual maximum, making
an annual ceiling on the total investment of £14,000. Unfortunately,
it is not normally possible for these funds to be held together
in order to accumulate at a faster rate.
ISAs are only guaranteed to exist until April 2009. If
they are replaced, you will have to find an alternative
investment or savings scheme.
You face the risk of stock market fluctuations if you
are using a stock market linked ISA. The estimated growth
rates used at the start of the plan may be quite inaccurate
and there is a good possibility that it may take longer
than planned to pay back your mortgage if your investment
does not perform as well as planned. Tax-free savings are
great in theory, but where an ISA is equity-linked it's
not so great when the value of the investment is actually
falling. This problem can be alleviated to some extent by
using an ISA that buys into investment bonds, which generally
provide a more predictable investment return.
You are slightly vulnerable to poor investment decisions
by the managers who run the ISA. Always check out the past
performance of the ISA provider, but remember the much-vaunted
saying 'past performance is not necessarily a guide to future
returns and the value of your investment can go down as
well as up'. Tying your mortgage to an ISA uses up your
tax-free savings allowance. If you are a high earner that
pays the highest rate of tax, then you may wish to keep
this allowance free for other purposes.
If you are planning to set up your own portfolio of investments,
you should be aware that there is no guarantee that they
will perform sufficiently well to pay off mortgage debt.
Self-management requires a strong knowledge of how the markets
work, making this a very high -risk strategy for mortgage
repayment, suitable for only a very small minority.
