INDIVIDUAL SAVINGS ACCOUNT (ISA)

How does it work?

You make a monthly payment to the lender to repay the interest on the amount borrowed, and start to invest into an ISA plan. The capital in the plan builds up over the term of the mortgage to repay the outstanding capital. ISAs allow you to invest in cash, life assurance, stocks and shares, and work in much the same way as the endowment method.

ADVANTAGES: Your money could grow faster within an ISA fund than an endowment because of tax advantages and because ISAs invest most of your money into stocks and shares. This means they can grow very quickly if the stock market performs well. On the other hand, if there's a stock market slump, there's a risk that you may not be able to pay off your loan at the end of its term. They are more flexible than endowments and can work out cheaper.

DISADVANTAGES: Risk - Stockmarket fluctuations could adversely affect the value of the plan, as your capital is not guaranteed. Therefore, there is no certainty that you will be able to repay the mortgage. Also, you need to arrange separate life and ill health cover, if appropriate. There is no guarantee ISAs will continue indefinitely and certain tax benefits are available only until 2004. ISA contributions are currently restricted to a maximum of £7,000 in any tax year.

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