Mortgage Equity Plan - Help!

lowis

I am in the process of getting an interest only mortgage with the Nationwide and they require me to have a plan in place which will pay off the capital at the end of the 25 year term. I spoke to one of their in-house advisors and he suggested the Natiownide Tracker Fund.

I don't have to get the plan from the Natiownide - I just have to prove I have one in place. Now, I understand very little about investment saving and have been trying to look at alternatives to the Natiownide Tracker, trouble is I'm not sure what to look for. Is a Unit Trust the same thing? It sounds like it from definitions I have found on the internet. Would my Natiownide Tracker be 'tied' to the mortgage? Is this a good or bad thing? Is the tracker an Endowment - have been reading horrors about these recently?

Initially I only have a small amount to save into this sort of fund each month - around £30 at the moment and I also want to open an ISA account where I can put £200 each month (I need instant access to this money so won't put it into long term tracker where the risk is higher).

Any advice or tips on where to look would be really appreciated.

Thank you.

PS - yes i know my £30 a month won't pay off the mortgage, i am just opening the account with the minimum amount in order to get the mortgage. i will be increasing the payment to a much better amount in about 6 months. i also have other options in place to pay off the capital.

dunstonh

I don't have to get the plan from the Natiownide - I just have to prove I have one in place. Now, I understand very little about investment saving and have been trying to look at alternatives to the Natiownide Tracker, trouble is I'm not sure what to look for. Is a Unit Trust the same thing?

I wouldnt touch nationwide for the ISA. An ISA is just a tax wrapper. It isnt an investment that makes or loses money. Its what you place inside that ISA that does that. Unit Trusts are one of the things you can put inside the ISA.

Would my Natiownide Tracker be 'tied' to the mortgage? Is this a good or bad thing?

Not tied but the Nationwide ISA would have built in checks periodically to ensure it is on track.

Is the tracker an Endowment - have been reading horrors about these recently?

No. The principle is the same as an endowment and the same risks apply. However, lower charges and better tax efficiency make it better.

Initially I only have a small amount to save into this sort of fund each month - around £30 at the moment and I also want to open an ISA account where I can put £200 each month (I need instant access to this money so won't put it into long term tracker where the risk is higher).

Your premium elimates the vast majority of the decent funds where £50pm is the minimum.

Any advice or tips on where to look would be really appreciated.

I would have to question this whole transaction. Nationwide, you say, are insisting you have a repayment vehicle. Yet they are willing to let you proceed on one that does not have a sufficient premium to come even close to what is needed. Something does not seem at all right about this transaction. I reckon your nationwide tied salesman is trying it on.

EdInvestor

I only have a small amount to save into this sort of fund each month - around £30 at the moment and I also want to open an ISA account where I can put £200 each month..

250 quid a month (ie the full annual allowance) into a cash ISA @4.5% over 25 years would produce a final sum of 136,933 at no risk.

How does that stack up against the mortgage amount?

superjames4

if you're sure you don't want a repayment mortgage then you could open a mini-stocks/shares ISA for your monthly £30 (max £4k pa). You could then still have your seperate cash ISA for instant access.

If you use a fund supermarket you can then have flexibility about which fund to invest in. You can switch easily at any time, and spread your investment accross more than one fund (subject to minimum amounts)

I use Fidelity Fundsnetwork but there are others.

Then you need to choose the actual fund that your money will be invested in. If you want a tracker, things to check are which index it's tracking (FTSE100, FTSE All Share, FTSE 250), tracking error (is it really returning the same results as the index) and charges.

For example (I'm not recommending this fund - it's just cos it's one i know about)

Fidelity Moneybuilder UK Index
Tracks - FTSE All Share
Tracking Error - 2005 did 0.3% better than index (before charges)
Initial charge - 0%
Annual charge - 0.3%

I don't know what the minimum monthly investment on this fund is though. But assuming £30 is ok, you could start off with £30pm into this fund via fund supermarket ISA - then you can vary the amounts, start/stop any time. Switch to a different fund any time. Split investment (past and/or future) between funds any time. And keep track of everything and do transactions on the internet. As well as doing the fund research.

Just illustrating with Fidelity because I know about them - there are obviously others.

regularsaver1

whats the reason for going interest only?

thats why Nationwide check you have something in place as an FSA requirement

lowis

Thanks everyone.

dunston - yes, i i think they are keen for me to sign one of their tracker plans but that's why i came here first to ask about this, i want to look at other options for sure. i did explain to the FSA that I will be able to pay the capital sum off by the end of the 25 years using other means. but like you say, he probably just wants me sign with him for comissions etc.

Ed - the mortgage is for £92k :-)

regularsaver - i am getting an interest only with a short term view. my plan is to move on to a repayment mortgage within the next 3 years. if i get a repayment at the moment it leaves my finances stretched, with an interest only i have room for interest rate rises, repairs bills etc etc.

EdInvestor

To pay off a 92k mortgage over 25 years using a cash ISA with an average interest rate return of 4.5%, you would need to save 168 pounds a month.
Just as a matter of interest,how does this compare with the monthly payment on the repayment mortgage?

if i get a repayment at the moment it leaves my finances stretched, with an interest only i have room for interest rate rises, repairs bills etc etc.

This sounds like a sensible approach to me. Some people like to take an I/O mortgage long term and then regularly overpay it, so that it behaves like a repayment mortgage, but also offers flexibility. THis is very helpful in case of loss of job, relationship failure or bereavement etc, as you can just stop the overpayments rather than having to reorganise the mortgage with all the attendant fees etc.

Apart from offset/current account mortgages (which are expensive) does anyone offer good deals on this I/O plus flexi (fee free) overpayment basis?

lowis

hi ed
a repayment mortgage would mean payments of £540 a month, almost £160 more than interest only. i am allowed to overpay by £500 each month and I plan to overpay every month when possible, obviosuly not the full 500, but say 100 or so.

the NW advisor told me that the mortgage equity plan requires me to pay £136 a month in the hope of getting £92k in 25 years time. but as i understand it my capital can go down, doesn't seem like the best option to me! anyeway, i can open up a 'token' plan anywhere it seems, although obviously if i open a plan up i will do so with a long term view of making it work.

homersimpson_3

I wouldnt touch nationwide for the ISA....I would have to question this whole transaction. Nationwide, you say, are insisting you have a repayment vehicle. Yet they are willing to let you proceed on one that does not have a sufficient premium to come even close to what is needed. Something does not seem at all right about this transaction. I reckon your nationwide tied salesman is trying it on.

please explain why nationwide shouldn't be touched. i understand point about questioning transaction because it doesn't right at all. is this the only reason- or shouldn't we go to nationwide for other reasons?

dunstonh

Nationwide fund range is very poor. You are paying for a bank product (where the vast majority are very poor or mediocre at best) when you can get a lot better elsewhere.

EdInvestor

lowis wrote:

hi ed
a repayment mortgage would mean payments of £540 a month, almost £160 more than interest only.

Almost the same as a cash ISA @4.5% then

the NW advisor told me that the mortgage equity plan requires me to pay £136 a month in the hope of getting £92k in 25 years time.

That's a pretty pathetic return, considering you're paying charges as well.

i am allowed to overpay by £500 each month and I plan to overpay every month when possible, obviosuly not the full 500, but say 100 or so.[/quote

Sounds fine to me.

i can open up a 'token' plan anywhere it seems, although obviously if i open a plan up i will do so with a long term view of making it work.

Will you cash ISA not do for the moment as a token plan until you're at the stage where you can increase the overpayments? Or does it have to be a risk based plan ( so they can impose charges?)