ISAS: Is this a good way to pay for your home?

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The Independent Online
If you have been using a PEP as the vehicle to pay off the capital on your interest-only mortgage then beware the individual savings account.

The ISA has replaced the PEP but the transition is causing havoc - and experts warn it could leave thousands of borrowers failing to pay off the capital on their mortgages.

All PEP holders will have received letters from their fund managers informing them that monthly contributions can no longer go into a PEP. Most fund managers have offered their clients the opportunity to transfer their payment into an ISA simply by signing a new direct debit mandate.

The theory is that the ISA will pick up where the PEP left off. But many argue that the ISA as a repayment vehicle may prove unreliable.

The first problem is that thousands of people are now without any repayment vehicle at all. PEP providers say around 20 per cent of clients haven't signed up to transfer payments. Fund managers have had to suspend the direct debits.

Barry Williams, of independent financial advice firm Donnellsons, says: "If someone were not to realise for a year that their direct debit had been stopped, it would have serious implications for their ability to pay off the capital on their mortgage."

The Consumers' Association is also concerned. Senior policy researcher Philip Telford says: "Nobody wants a situation in 15 years' time where thousands of people have their houses repossessed because they didn't realise that their payments were cancelled in April 1999."

There are still obstacles when the fund manager has permission to transfer funds into an ISA. Robert Guy, technical director at independent mortgage brokers John Charcol, says: "The real problem with the ISA as a repayment vehicle is that it requires you to know what your circumstances are going to be in 12 months. If someone takes out a mini ISA because their monthly payment is less than pounds 250, but comes into more money later in the year and wants to put this into a maxi ISA, they will not be able to do so."

If you don't feel confident using an ISA to pay off the mortgage then IFA Barry Williams offers an alternative. "Most PEPs have outperformed their projections," he says. "For some people it might be worth cashing in their PEP to pay off some of the capital on their mortgage and transferring to a repayment mortgage."

However, to give the ISA mortgage a fair crack you need to sit tight and see how the market develops. Legal & General and Norwich Union have launched packaged ISA mortgages and many lenders are expected to follow soon.

Contacts: Legal & General, 0800 092 0092; Norwich Union, 0800 056 2450.