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
ebooksAn introduction to the ground rules of British democracy
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.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Day In a Page

Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

No grace of God for Katy Perry as sisters act to stop her buying convent

Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

Residents just want water and power in a city chosen to be a ‘smart’ metropolis

The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

Something wicked?

Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
10 best sun creams for body

10 best sun creams for body

Make sure you’re protected from head to toe in the heatwave
Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

Nick Bollettieri's Wimbledon files

Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

There is more than a shiny trophy to be won by England’s World Cup women

The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map