Money: Pick your home loan with care
Will the new ISA mortgages fill the gap left by PEPs? asks Faith Glasgow
Sunday 07 March 1999
The PEP mortgage is similar to an endowment mortgage in that the borrower pays only interest on the loan to the building society and funds the capital repayment through monthly payments into a separate stock market-based investment; but that investment is wrapped in a PEP rather than an insurance policy. The theory is that at the end of the term, the investment will have prospered on the back of shrewd fund management and a thriving stock market and grown to more than cover the original capital sum owed.
One big attraction of the PEP mortgage is its tax-free status. Investors can put up to pounds 6,000 into a general PEP and a further pounds 3,000 into a single company PEP each year without having to pay tax on either income or capital growth. By contrast the insurance company has to pay tax on an endowment fund, so there is a regular leak from the cash pool.
The other plus is that PEP mortgages are flexible. You can pay in additional lump sums, increase your monthly contribution, take time out from payments or even withdraw money if necessary, as long as you do not exceed the annual allowance. By comparison, endowment policy holders are seriously penalised if they cannot keep up monthly payments or need to redeem the policy.
But fact that PEPs are so accessible can be a temptation for less disciplined savers. And they are relatively volatile - there is always the chance that all your stock market gains may be wiped out by a single unfortunately timed market crash. Endowment policies grow by a calculated bonus each year, which enables the insurance company to smooth the ups and downs of the market over the policy's life.
None the less, many people have opted for PEP mortgages over the last five years or so. But are they necessarily wise to make the jump to ISAs in April?
ISA mortgages will operate along similar lines to PEP predecessors but there are lower limits to what you can stash away free of tax (pounds 7,000 falling to pounds 5,000 annually). ISAs have the advantage, however, that a wider choice of investments is eligible for inclusion. They may also turn out to be slightly less expensive because recommended management charges of a maximum 1 per cent have been laid down in the Government's guidelines. Annual charges of up to 1.5 per cent are the norm under the PEP regime.
There is a feeling among mortgage brokers, nonetheless, that not every PEP mortgage holder will slide smoothly into the ISA successor. David Archer, at mortgage adviser John Charcol, believes ISA mortgages will have their place and will be suitable for some clients. However, he thinks they will not prove as popular as PEP mortgages. In part, he says, that is because the tax-free allowance is so much lower with ISAs than with PEPs and Tessas, and people may not wish to use the whole thing to fund their mortgage.
Secondly, says Mr Archer, the demise of PEPs has made clear the limited life of ISAs and brings into question their suitability for paying off a mortgage over 25 years. Another consideration is that from April the tax treatment of PEPs and ISAs will change for the worse, so that any dividends (the income generated by shares in the fund) will be subject to 10 per cent tax; in five years this will go up to 20 per cent.
What should current PEP mortgage holders do? Any existing PEPs will continue as they are but mortgage holders need to make alternative arrangements after April if they are to avoid the risk of a capital shortfall when it comes to repayment. You may well have been contacted by your financial adviser or fund manager, giving you the option to continue investing into the equivalent ISA with the same manager. If you are happy with performance then it probably makes sense to do that. It will not happen automatically, however. You will have to complete an application for the ISA.
If you are not satisfied, of course, this is a good time to take your custom elsewhere. Remember that ISA mortgages, like PEPs, depend on the vagaries of the stock market. If you are not comfortable with that uncertainty, then choose a less risky alternative.
PACKAGES AT A PRICE
Many companies sell packaged mortgages - a bundle including mortgage, in-house PEP, life assurance and other optional protection such as critical illness or mortgage protection cover, all in one. A lot of them will do the same for ISAs: Legal & General, for instance, has just announced plans for a new flexible ISA-based mortgage, to be launched this month. It will include an ISA that tracks the FT-SE All Share index, plus built-in life cover.
But packages do not generally offer as good all-round value or performance as you would find if you shopped around for each element separately and constructed your own deal. Choose an ISA fund that aims for steady capital growth - a tracker fund is a good bet.
25 July 2014 11:00 PM
A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.
Problem gambling: Amid heavy advertising and a surge in remote sports betting, more and more 16 to 24-year-olds are now seen as 'at risk'
26 July 2014 12:00 AM
25 July 2014 11:00 PM
Payday loan firms have been accused of bombarding financially vulnerable people with nuisance phone calls, after a debt charity reported that a third of its clients were plagued by the messages.
24 July 2014 12:00 AM
A plan to defuse a “mortgage debt timebomb” when interest rates rise is published today amid warnings that 2.3m households could struggle with their repayments.
Current accounts are too costly and confusing, says CMA as it announces investigation into Britain's biggest banks
19 July 2014 12:00 AM
19 July 2014 12:00 AM
11 July 2014 12:20 AM
11 July 2014 12:20 AM
How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.
11 July 2014 12:20 AM
04 July 2014 03:49 PM
MPs want medical evidence for claims. Will this bring higher premiums?
04 July 2014 11:00 PM
British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.
- 1 Pope Francis issues top 10 tips for happiness
- 2 Disney heiress Abigail disowns her share of family profits in West Bank company
- 3 Now diplomacy has failed, boycotting Israel might be the only way we can protect the people of Gaza
- 4 Israel's propaganda machine is finally starting to misfire
- 5 Kelsey Grammer forgives the man who raped and murdered his sister in 1975
The secret report that helps Israel hide facts
Land for gas: Merkel and Putin discussed secret deal could end Ukraine crisis
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
Richard Dawkins tweets: 'Date rape is bad, stranger rape is worse'
Putin is 'thuggish, dishonest and reckless', says British ambassador to US
Boozy, ignorant, intolerant, but very polite – Britain as others see us
- < Previous
- Next >
iJobs Money & Business
£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...
£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...
£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...
Negotiable: Harrington Starr: Operations Engineer (Redhat, UNIX, Solaris, Data...
Day In a Page
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000