What tax advantages can I have attached to a mortgage? How the taxman can help you if you take out a mortgage

Tax advantages do exist, in relation to mortgages. Unfortunately these advantages usually work with interest-only mortgages which are more risky and well worth avoiding.

Let's analyze the possibilities of tax relief for mortgages.

ISA Mortgage

Firstly, there's the ISA Mortgage. A ISA mortgage is a interest only mortgage with a ISA account used as a provision for the payment of the capital sum at the end of the mortgage term.

The first type of Individual Savings Account is a regular savings account that can be opened by anyone 16 years of age or older. Regular savings accounts have a tax on interest earned of 20%. Regular ISAs, also known as Cash ISA's are exempt from this tax up to a deposit limit of £ 3000 (£ 3600 as of April 6 2008) per fiscal years. This way, you save up to repay the capital sum with tax-free interest.

The second type of Individual Savings Account is the equity ISA for which the funds in the account are invested in shares. This account can be opened by anyone above 18 years of age and has a tax free limit of £ 4000 (£ 3600 as of April 6 2008). Another option, if you do not wish to open a regular ISA in parallel is to have a maxi equity ISA of a maximum of £ 7000 (£ 7200 as of April 6 2008 ). The tax advantages of this type of ISA are not as transparent as the regular ISA.

Pension Mortgage

The Pension Mortgage is another type of interest-only mortgage who's repayment vehicle is subject to tax advantages. The provision for the capital sum payment at the end of the mortgage term, for this type of mortgage, is the pension fund that you pay into. The tax advantage is that you can claim 28% of the deposited amount as tax relief, if you are in the normal tax bracket and 38% if you are above it.

Final Word

These tax advantages, as can be seen, are not a result of the mortgage itself, but a result of the repayment vehicle. Both of these tax advantages can be had even without a mortgage, or in parallel with a mortgage but with no connection between the two. As such, we do not recommend counting tax relief as an advantage to interest-only mortgages. Further more, we do not generally recommend interest-only mortgages as the repayment vehicles for any type of interest only mortgage rarely work out as intended.

For more information on interest-only mortgages please refer to our other mortgage guides. Remember that a mistake in your choice of mortgage could cost you tens of thousands of pounds over the term of the mortgage. It is always cost effective to be informed.