An ISA mortgage requires that the owner pays only the interest accrued on the capital which has been borrowed.
The home owner opens up an Individual Savings Account, or ISA, which is used to save enough money to pay off the mortgage loan at the end of the term.
There are two types of ISA, a cash ISA or a stocks and shares ISA. Both these types of accounts are exempt from capital gains tax and income tax. There is an upper limit of £7000 which may be invested each year, £3000 of which can be cash and the remaining £4000 in equity.
Money can grow quickly in a cash ISA but with an equity ISA there is a very high risk factor involved. The stock market can fluctuate greatly so any returns cannot be guaranteed, leaving the possibility of a shortfall on the capital borrowed on the mortgage.
You need to be extremely disciplined to save a considerable sum regularly into a cash ISA. Failure to do so can mean there won’t be enough to cover the mortgage repayment at the end of the term.
Almost all banks and building societies offer ISAs, however it’s wise to shop around as the rates they offer can vary.