Money: Pick your home loan with care

Will the new ISA mortgages fill the gap left by PEPs? asks Faith Glasgow

One of the most popular and efficient ways of funding a mortgage in recent years has proved to be the personal equity plan (PEP). But the many borrowers who are repaying their loans through regular contributions to PEP accounts face an uncertain time in April, when PEPs and tax-exempt special savings accounts (Tessas) are replaced by their less bountiful cousins, individual savings accounts (ISAs).

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.


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.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Labour will raise the national minimum wage to more than £8 an hour by October 2019 (EPA)

Barclays new Blue Rewards hands cash to customers. What’s the catch?

Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month

New research reveals that despite the recovering economy, four out of five low-income households have seen no sign of their financial situation improving

Hard-up families could be eligible for financial help

A charity is urging anyone struggling financially to see if they could get help from the state

When is the best time to buy foreign currency?

Video: With an election looming, a hung parliament could hit sterling

General Election 2015: Vote for the party that will boost your finances

Experts warn that the general election is unlikely to lead to stable markets. Simon Read talks to two investment managers who are advising caution

Make the most of your money in 2015-16: The end of the tax year is the beginning of the next...

The new tax year brings with it a raft of new rules and regulations
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

    £20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

    Ashdown Group: Marketing Executive - 6 month FTC - Central London

    £25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

    Ashdown Group: Junior Project Manager (website, web application) - Agile

    £215 per day: Ashdown Group: Junior Project Manager (website, web application ...

    Guru Careers: Software Engineer / Software Developer

    £40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before