Investors holding Isa or Peps as an investment vehicle designed to repay their interest-only mortgage could struggle to repay their mortgage debt, according to a Lincoln-based broker.
Terence O’Halloran, senior partner at O’Halloran and Co, believes that using an Isa or Pep as the investment to repay an interest-only mortgage could be worse than relying on an endowment plan.
He said: ‘Much has been said regarding the potential shortfall of endowment assurance contracts in so-called endowment mortgages. If endowments fail then Isa and Pep mortgages certainly will. We have been through stock market adjustments before and it had little effect ‘ 25 years is a long time and endowments are designed to smooth returns, taking surpluses from good years to bolster shortfalls in poor economic climates.’
He added: ‘The problem with Isa and Pep contracts is that they have no smoothing mechanism. While they benefit ‘ as endowments do ‘ from pound cost averaging over the long-term, market adjustments such as those we have seen recently, will obviously have a more protracted short term effect.’
Standard Life Bank has seen a noticeable decline in its interest-only mortgages over the past three months and expects this trend to continue.
Alan Dring, head of sales at Standard Life Bank, said: ‘We are finding it easier to sell the capital repayment products. We are getting 40% of our mortgage business from interest-only mortgages and we expect this to decline further. Flexible options are proving to be more attractive. People are now finding that the low interest rates on flexible mortgages are the ones which they can handle comfortably.’
Dring said that the decline in interest-only mortgages is a ‘spin-off from the endowment issue’ and that people no longer view a mortgage as being a long-term commitment. ‘The ability to be able to overpay on a mortgage is uppermost in people’s minds ‘ they no longer think 25 years. An interest payment vehicle for 25 years no longer exists as people are thinking more of the short term,’ he said.
Susan Knight, assistant press officer at Cheltenham & Gloucester, does not foresee the same shortfalls as with endowment mortgages but warns those with Isa or Pep mortgages to be aware of the risks associated with the product.
‘Any customers with an investment product such as an Isa or Pep should keep a close eye on the product, especially when there are low interest rates.’