There are two types of Isa, or individual savings account: the cash Isa and the equity Isa.

In theory, you could use either one as a repayment vehicle for the capital part (the original sum borrowed) or your mortgage, running alongside an interest-only loan.

Cash Isas

These are like traditional low-risk savings accounts (also known as deposit accounts), with one important difference

With an ordinary deposit account, basic-rate taxpayers have to pay 20 per cent savings tax on the interest they earn.

With a cash Isa, all the interest is tax free, helping your nest egg grow more quickly.

They are available from banks, building societies and internet savings providers, but the rates offered vary tremendously, so it’s vital to shop around to find the best available.

Anyone over the age of 16 can open one cash Isa per tax year (April 6 to April 5) and deposit up to £3,000. (This rises to £3,600 a year from April 6, 2008.)

 

Equity Isas

These are an entirely different animal: invested in company shares (equities) available on the stock market, they are highly risky, and the tax benefits are far more complex and less significant for most people.

They are available through fund managers, who despite their best professional efforts, could leave you with considerably less money than you put in.

Everyone over the can open one mini equity Isa a year, investing up to £4,000 (£3,600 from April 2008), plus one cash Isa

Or one maxi Isa, investing up to £7,000 (£7,200 from April 2008) in shares, with or without a cash element.

To find out why Isas are not generally a good choice for a mortgage repayment vehicle, read The dangers of an Isa mortgage.