Should you use ISAs to cover interest-only mortgages?
Is it a good plan to combine interest-only mortgages with ISA investments to pay off the loan?
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Plugging into IFA Promotion's network of specialist financial advisers myfinances.co.uk answers your questions.
Question:
"Would you recommend an interest-only mortgage fixed for 3 years with ISA investment?"
Christopher Wicks, of The Alexander Beard Group, replies:
The choice of mortgage depends on what level of risk you are prepared to take.
If you want to be certain that the mortgage will be repaid at the end of the term the only option is to take out a capital repayment mortgage.
Any other option involves a degree of investment risk and you are effectively borrowing to invest.
For the borrowing to be worth your while the rate of return on the ISA needs to consistently be more than the interest charge on the loan.
You also have the risk that the proceeds of the ISA will be insufficient to pay off the mortgage.
In general, for most people repayment mortgages are the safest option as the probable returns on an ISA are unlikely to make it worthwhile taking the additional risk.
Christopher Mayes, of Boyett Mayes & Associates, adds:
In relation to a three-year fixed-rate mortgage, you need to take into account the initial costs and any fees specific to the mortgage deal.
As an observation, these fees have been increasing at the same time as the redemption costs have been decreasing.
Careful attention ought to be paid to the redemption charges, particularly if your circumstances might change during the three-year term.
Competitive rate products tend to have redemption charges beyond the term of the fix or very high fees.
In conclusion whilst a rate may appear attractive, the combination of terms, charges and one-off fees ensure that the lender still makes a profit from the contract.
Therefore, it is quite likely when costs and terms and conditions are taken into account, the overall package will be closer to the general rates available.
Consequently, the reason for fixing is usually personal or specific to your objectives.
Using an ISA to repay a mortgage is not unusual, however, you need to appreciate the investment risk on a product of this type.
In evidence of this, the majority of mis-sold endowments are deemed so, because the clients did not have a satisfactory understanding of the risks they were taking.
Even if the ISA investment were cash-based, there remain fluctuating rates of return throughout, thus you need ongoing advice to ensure the plan continues to meet your objectives.
If you have an ISA question, got to www.myfinances.co.uk/ask-the-isa-expert
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