Customers who opt for an interest only mortgage, and feel themselves fortunate at the extraordinarily low monthly installments, wake up. The mortgage may be fast approaching its repayment. Interest only mortgages require only the interest to be repaid as monthly installment. This means that the mortgage amount continues to be the same even when the mortgage reaches its maturity date. Paying the whole amount of the mortgage all at once will be difficult. Therefore, it will be prudent to plan the mortgage repayment right from the start. ISAs or individual savings account mortgage will be a proper choice in this direction. Individual savings accounts were launched in April 1999, to replace Tax Exempt Special Savings Account (TESSA) and Personal Equity Plans (PEP). There are two benefits of individual saving accounts. First, it grows unhindered because the government offers tax relief to people who save in individual savings account. Second, this accumulated amount, after growing up to a sizeable figure, will repay the mortgage. Individual savings account is not exactly an investment. It is in fact a protective cover that allows the other investments to grow tax-free. These are for all classes of people, as long as they are aged 18 years or above. They need not necessarily be taxpayers, but they need to be residents of the UK. However, individual savings accounts have yet to make their mark as a repayment option. The principal problem is the amount of jargons that people will have to deal in, like maxi ISAs, mini ISAs, equity ISAs etc. It becomes intricate for a non-professional to understand what each of them is, and how it works. According to the rules, a customer is allowed to save only up to ?7000 a year. This can be saved all in a single maxi ISA, or broken up into three mini ISAs. Confused as to what maxi ISAs and mini ISAs are! Let us explain. A mini ISA can include only one component of investment. Maxi ISA on the other hand includes more than one component. The components of the ISA can further classify them into cash ISAs and equity ISAs. Cash ISA is one where the customer saves in the form of cash. However, there is a limit to cash savings. The maximum cash savings admissible is ?3000. The rest must be saved in the form of stocks, shares and life insurance. The latter is known as an equity ISA. One point on which the ISA mortgages scores over other kind of repayment vehicles is that they allow the mortgagor to access cash as and when they want. Pension fund on the other hand, is inaccessible for the customer until he reaches the age of 50. In addition, there are no or lesser penalties if the customer fails to pay to the ISA. The customer can discontinue payment to the ISA anytime that they desire. Endowment funds on the other hand charge heavily for defaults in payment. However, the limit on the amount of savings is seen as a drawback of ISAs. One may not be able to repay the mortgage earlier or before maturity even if they have resources to effect the repayment. The presence of the shares as a form of savings gives it an unpredictable character. The stock market is highly volatile. This means that there is no guarantee as to the final repayment of the mortgage, since stocks and shares do not always follow an ascending path. Nevertheless, the current trends of the stock market heavily recommend the equity ISA. Besides equity ISA have a higher rate of growth than the cash ISAs in the long run. The customer will have to be very careful in deciding which ISA to opt for. If the ISA does not fare well, and the final amount does not match up to the amount of mortgage taken, then the customer will be in a tight spot. This is because he will have to pay the deficit from his own resources, and can even lead to repossession of ones home. |
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