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What is an ISA Mortgage?
This is a tax efficient way of repaying a mortgage and works in much the same way as the endowment method. Repayments to the lender are for the interest charge only and no reduction is made to the capital. The loan is repaid at the end of the term, or sooner if investment conditions have been good, from the fund built up within the ISA plan.

Your money should grow faster within an ISA than in an endowment fund because the plan manager has tax advantages within the investment. As an ISA is an annual contract with no fixed timescale it offers greater flexibility, particularly with regards to altering contributions or changing the plan provider.

An ISA does not provide life cover and as the amount of the loan does not reduce over the timescale the simplest form of protection is level term assurance. This provides a guaranteed death benefit, for a modest premium, written over a specific number of years. There is no surrender value with this type of contract.

 
What are the advantages?
  1. Income and capital gains from an ISA are free of tax and therefore this investment should offer the greater growth potential over the medium to long term, than with an endowment.
  2. Greater flexibility than endowment - money can be taken out of an ISA plan at any time without penalty, perhaps to repay part of the mortgage early.
 
What are the disadvantages?
  1. ISA contributions are currently restricted to a maximum of f 7,000 in any tax year.
  2. Stockmarket fluctuations could adversely effect the value of the plan, as your capital is not guaranteed and ISAS tend to have a medium to higher risk profile.
  3. Benefits are not guaranteed to repay the mortgage.
  4. Some lenders will restrict the percentage of loan backed by an ISA, thereby requiring an additional repayment method for the balance.
 
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