PEPs are no problem

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Fears that a future Labour government will put an end to personal equity plan mortgages may be unfounded. Some advisers have expressed worries that taking out a PEP-backed mortgage could be a mistake because Labour may abolish them. But an aide to Alistair Darling, Labour's spokesman on City affairs, has confirmed to Your Money that a Labour government will honour existing contracts.

However, a new PEP can be taken out every year. With a 25-year mortgage you buy up to 25 successive plans. Labour is unable to say whether new PEPs will be available if the party wins the election.

"We are aware of the need to encourage savings and the principal way of doing this is by adjusting the tax regime. It may be that certain adjustments are needed, but we are not committed to anything and have no specific policy on PEPs, Tessas or anything else," says the aide.

With a PEP mortgage, you pay back only interest to the mortgage lender. At the same time you make separate payments into a PEP to build up sufficient capital to repay the loan after a set period, typically 25 years.

A possible threat should not be a deterrent to taking out a PEP mortgage. If they were abolished it should be easy to switch the loan to, say, a repayment basis, where payments to the lender include interest and part of the capital borrowed.

Two things tend to drive the individual's choice of mortgage. One is advice from a lender or estate agent, and this can often favour high- commission endowments. The other is initial monthly cost, and here PEPs look good at the moment.

As a general rule, interest-only mortgages backed by some sort of investment plan get cheaper in relation to repayment mortgages as interest rates fall. With current low interest rates, they should be more attractive than in the past.

Figures supplied by the Bath-based broker London & Country Mortgages confirm that PEP mortgages are looking cheap. A 30-year-old male with a 25-year, pounds 50,000 loan at 7.24 per cent would have a monthly outlay of pounds 338, including pounds 56 for the PEP and pounds 8 for life insurance. This is less than the pounds 346 a repayment mortgage would cost. At pounds 353, the endowment still costs more than the repayment loan.

With a mortgage rate of 10 per cent, the repayment loan becomes the cheapest at pounds 429 a month, compared with pounds 443 for a PEP loan and pounds 458 for an endowment.

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