Money: ISA mortgage fears

At first sight the pounds 50,000 limit on the amount any one individual can invest in a new tax-exempt Individual Savings Account (ISA) seems to spell doom for personal equity plan mortgages, the most tax-efficient way to repay mortgage loans. The average mortgage is around pounds 50,000 and could be higher by 1999. More than 10 per cent of new mortgages are repaid out of PEPs.

The pounds 50,000 limit caused consternation at the Paymaster-General's press conference, especially among financial journalists who have PEP mortgages. The Inland Revenue's assurance that existing PEP mortgages are far too new for the accumulated funds in the backing PEPs to have reached the threshold was not wholly reassuring.

Thanks to the surge in share prices over the last two years, some PEP plans taken out to repay mortgages may well be worth in excess of pounds 10,000 and could be significantly more by April 1999, given a continued rise in the stock market. They will have to be rolled into an ISA at their value at that time rather than the amount actually invested. Some PEP mortgage holders could find around a third or more of their lifetime ISA limit has been used up.

However Jim Willens, managing director of Nationwide Life, believes new mortgages under pounds 150,000 should not be affected by the Government's plan to replace PEPs and Tessas with ISAs.

The pounds 150,000 threshold is based on a rule of thumb that individuals can pay pounds 166.66 a month, or pounds 2,000 a year, into an ISA for 25 years before they reach the lifetime limit of pounds 50,000. Meanwhile, the investments should grow to around pounds 150,000 over the 25 years, using the financial services industry's current rules for projecting possible maturity values, which assume investments can grow by 9 per cent a year compound.

Keith Abercromby, head of products at Halifax Financial Services, reaches a rather more conservative figure of pounds 125,000 by reducing the assumed growth to 8.25 per cent to allow for the loss of corporation tax privileges in the last Budget, and to 7 per cent to allow for initial and management charges on the PEP.

Actual growth will depend on the skill of individual investment managers and the success of their selections, and also on the charges they levy over the life of the investment, which will reduce projected growth rates by 1 to 1.5 percentage points a year.

Only 3 per cent of existing PEP mortgages exceed pounds 150,000. Mortgage lenders will continue to offer PEP mortgages until April 1999 and will switch to ISA mortgages from then on.

But Robert Guy, technical director at independent financial advisers John Charcol, thinks ISA mortgages will be inadequate to fund the purchase of many family homes in London and the South-east.

If property prices continue to rise and successive Chancellors refuse to raise the pounds 50,000 threshold in line with house prices, more people will find ISA mortgages alone will not be enough to pay their mortgages in full. They may have to take out additional endowment policies or start paying off some capital as well as interest to be sure of clearing their mortgage when it falls due.

Pressure groups will argue strongly during the consultation period between now and the end of January that the lifetime limit of pounds 50,000 will be unfair on single home owners - especially single parents bringing up children - who will be limited to a single ISA. Married couples and others with joint mortgages will have more than one tax-free ISA limit to service a mortgage.

The ISA examined, back page

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Arts and Entertainment
a clockwork orange, stanley kubrick
film
Extras
The Tesco Hudl2: An exceptional Android tablet that's powerful, well-built and outstanding value
indybest

Life and Style
food + drinkAuthor DBC Pierre presents his guide to the morning after
News
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Life and Style
food + drink
News
i100
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas