UK Mortgage definition

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Individual savings account (ISA)

This is an account which allows you to save money in a tax efficient environment. You are allowed to set up Individual savings account each tax year up to a maximum of £7200, which can be part in a cash ISA (£3600 max) and part in a 'stocks and shares' ISA or all in a 'stocks and shares' ISA (£7200 max.). For a cash ISA you currently gain tax relief on interest income. For a stocks and shares ISA you currently gain tax relief on capital gains but pay basic rate tax on income from dividend and interest on cash held. The value of a cash ISA can now be transferred to a 'stocks and shares' ISA while maintaining the tax benefits. However the reverse is not true. These parameters may change in each future Government Budget Review.

A series of 'stocks and shares' ISA's taken out in subsequent years can be used to repay an interest only mortgage at the end of the term. The hope is that the long term tax free gains on stock market investment will make enough to cover your mortgage provided you invest in enough ISA's over the term. It is unlikely that investing in a cash-only ISA each year would accumulate enough to pay off any but a relatively small mortgage. If you are considering using cash see Flexible mortgage.