Hello and welcome. Thank you for providing an opportunity to assist you.
I will keep the reply crispt and simple so as to avoid any complexity.
Interest only mortgages should be best avoided. With an interest-only mortgage, however, the whole of the monthly mortgage payment is made up of interest, so none of it goes towards paying off the loan. So if, for example, you took out an interest-only mortgage of £100,000, at the end of the mortgage term you would still owe your lender £100,000. The mortgage loan would go down only if you chose to make repayments of capital in addition to the monthly interest payments. That is largely why interest-only mortgages have lower payments than repayment mortgages.Having said this,
if you compare this to the regular repayment mortgages, most of your monthly mortgage payment is initially made up of interest, with a little of it going towards repaying the actual loan. Over time, however, more of the monthly payment goes towards repaying the capital with less being spent on interest. The further into the mortgage term you get, the lower the interest bill, because the size of the loan gets smaller.
Over and above all this, you will still have to show to the lender and satisfy him as to how will you replay the mortgage.
Usually, therefore, interest only mortgages are not preferred.The following is a very good reference and general information link.
Taking your query further, you can opt for both, separate account of ISA. Separate account would be preferred as any additional payments would result into reduction of your loan amount and therefore your interest.
From tax point of view, it will make no difference as to how you declare it or if you have an ISA or a separate account.
I am sure this would help.
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