Mortgage Confusion

My boyfriend is keen for us to take out a PEP mortgage. Can you explain how endowments and repayments work so I can base my decision on the full facts?

B King

Stirling

PEP mortgages are great as a tax-effective way of repaying a mortgage due to their flexibility. You can adjust the level of contribution you make to the PEP. You pay interest only throughout the period of the mortgage in addition to your PEP contributions, and the PEP is designed to pay off the capital outstanding at the end of the term - it may even be early if you pay additional amounts. But this arrangement is not ideal for everyone. As they are linked to the performance of the stock market, PEPs can also be a riskier option.

With an endowment mortgage you pay interest only throughout the life of the loan and make a further monthly payment to a life assurance company, which arranges the endowment policy. The endowment is designed to grow and repay the outstanding loan in full at the end of the term, possibly leaving a surplus to be taken as a tax-free lump sum. The endowment premiums also include built-in life cover which ensures your loan is paid off if you die before the end of the mortgage term.

With a repayment mortgage your monthly payments will include part interest and part repayments of the loan, guaranteeing this is repaid at the end of the term. You need separate life cover.

The repayment option guarantees the eventual repayment of the loan while the endowment offers flexibility and the potential of a tax-free lump sum.

Whatever you decide, seek qualified advice first. Ask for a breakdown of the potential benefits of all types of repayments for your individual circumstances. Beware the salesman who immediately suggests endowment repayments without consideration of the alternatives; he stands to make commission on the sale and you should ask him how much.

LEGAL ADVICE

I have chosen my property and lender. What advice would you give me for dealing with the legal side of things?

M Packer

London N6

Most people need a solicitor or a licensed conveyancer. Don't be afraid to shop around obtaining quotations, preferably in writing, for the work - fees vary tremendously. Ask for estimates of all the legal expenses you may have to pay, such as local authority search fees, land registry charges and stamp duty. Keep your solicitor fully updated, for example if you are arranging to buy carpets and curtains, because misunderstandings can cause delays later.

CODES OF PRACTICE

I am interested to know how the new Code of Mortgage Practice will affect mortgage lenders.

Susan Keeble

Milton Keynes

The Code of Mortgage Practice, issued by the Council of the Mortgage Lenders, came into force on 1 July. A key feature is that lenders are now divided according to their capabilities.

l Execution only lenders cannot advise you - you choose a mortgage which they then process.

l Informed choice lenders can tell you about the different types of mortgage they offer but again cannot advise you.

l Full advice lenders can analyse your financial details and advise accordingly.

Lenders will fit into one of these categories and you should ask them which one.

The code is voluntary and sets standards of good practice which lenders who subscribe have to follow as a minimum. Lenders will therefore be obliged to put the necessary measures and procedures in place to fulfil these commitments. Compliance to the code will be monitored by the independent review body. If you wish to check which lenders subscribe, contact The Council of Mortgage Lenders, 3 Savile Row, London W1X JAF.

George Wise is managing director of NatWest UK Mortgage Services

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