Questions of Cash: Mortgage Isa depends on the level of risk you want to take

Q My wife and I have an interest-only mortgage with Northern Rock for £113,000. Our independent financial adviser (IFA) recommends we support this with Isas. We each pay £150 per month into Fidelity Special Situations. Should we have different funds to spread the risk? Is our fund too volatile for a mortgage Isa?

A You need expert advice from someone you trust who knows your exact position. If you are unsure of your IFA's recommendations, seek a second opinion. Chris Jones, technical manager, financial planning, at Charcol brokers, says it is essential that your IFA's recommendation reflects your approach to risk.

Given the problems with endowment policies and falling stock markets, most borrowers will now be advised to use a repayment mortgage, Isa mortgages being a high-risk option. Mr Jones says: "By using two funds you reduce the risk of underperformance, but not by much if these are similar funds. A volatile fund is more suitable with regular payments than for single lump sum investment.

"We would recommend the Fidelity Special Situations Fund where it fits your goals, providing you understand the risk."

Q My mother-in-law, my wife and I jointly own our house with a granny annexe. There is a life policy on my mother-in-law so on her death the house does not need to be sold to make a bequest to my wife's sister.

The policy is a low-cost endowment with a minimum death benefit. My mother-in-law is nearly 90 and the annual bonuses plus the original sum assured have accumulated to a figure in excess of the minimum death benefit.

The policy is with Royal & Sun Alliance (RSA). Given their problems and poor bonuses, should we make the policy paid-up so that all benefits are preserved and stop paying the premiums? Should we sell the policy, or surrender it? SR, by e-mail.

A Philippa Gee, investment strategist at the IFA Torquil Clark, agrees that as the value of the investment exceeds the sum assured on your mother-in-law's life you should evaluate the policy because it no longer represents good value. But there is no market for an RSA endowment.

She says: "A paid-up policy would participate in regular bonuses, but these would be paid upon a reduced guaranteed sum assured. This makes the policy a less attractive investment proposition. A surrender value would be less than the present value of the policy, but you would be free to invest elsewhere.

"But, given your mother-in-law's age, equities are not appropriate because these will normally be used for only five years plus. The alternative is to hold the sum in cash, using your mother-in-law's mini-Isa allowance, and put the rest in other high-interest accounts. You should consider the risk of surrendering an endowment policy when your mother-in-law may need long-term care.

"Your mother-in-law should request additional information from RSA: surrender value and two projections of value-to-maturity, assuming premiums continue and assuming the plan is made paid-up."

If you have any questions about personal finance topics or problems, please write to Questions of Cash, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk. We regret that we can reply only to letters published here