Money: ISA mortgage fears

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The Independent Online
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.

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