I don't understand my ISA's

kenneth4

20 years ago my wife and I took out a Mortgage of £80,000 with the Woolwich which has since become Barclay's/Woolwich. We went in the branch for a capital and interest mortgage but after enduring a very hard sell we came out with an "ISA" mortgage. Four or so years ago we were advised by letter that the ISA's were only likely to provide £40,000 not the £80,000+ we were led to expect. Since this news, we have paid off a lot of the sum borrowed and currently owe £45,000. This is my big problem in all of this. We each pay £56 into our ISA's a total of £112 a month, over 20 years this amounts to £26,880 and our last statement showed we have accrued roughly £30,000 this appears to mean we have "earned" only £3000 over 20 years of saving £112 per month. Have we been well and truly ripped Off? and, should we take the £30k pay off the mortgage and re-mortgage via capital and interest for the remaining £15k?, I have retired my wife retires in 10 years.

Loughton_Monkey

With the benefit of hindsight, yes you have been ripped off. It's difficult to pinpoint in how many ways.

1. If I read your post correctly, you bought a "PEP Mortgage" 20 years ago (ISA's were introduced 1999, and then PEP's/ISA/s are now merged and all called ISA's).

2. The thinking at that time was that under a normal repayment mortgage, you are effectively earning X% interest on the 'repayment' part of your repayments (where X is your mortgage rate). It was thought you could earn better than X by investing in a tax-free PEP. Over time, this has proven to be wishful thinking. Hence you were given bad advice.

3. Some would argue you have not been 'ripped off' as much as you might think. This is because investment returns dropped significantly. The growth of your PEP was smaller then expected. And your mortgage rate probably dropped. If you had used the mortgage interest savings to boost the PEP, then the shortfall would have been much smaller. But even so, it was not a good idea to have a PEP mortgage.

4. It seems to me that the PEP itself was a bit of a rip-off. A PEP (ISA) is simply a "wrapper" for actual funds. Do you know what particular fund(s) you were invested in? They have certainly not performed well.

As to what is best to do now, you have not given enough information. We need to understand what your mortgage interest rate is, and how much longer the mortgage has left to run. With this information, it would be possible, roughly, to assume what your £30K might have grown to by then, and therefore what extra you need to save/invest/repay by then to avoid (what can be) a costly re-mortgage.

I assume your wife pays tax. Do you pay any income tax having retired?

dunstonh

3. Some would argue you have not been 'ripped off' as much as you might think. This is because investment returns dropped significantly. The growth of your PEP was smaller then expected. And your mortgage rate probably dropped. If you had used the mortgage interest savings to boost the PEP, then the shortfall would have been much smaller. But even so, it was not a good idea to have a PEP mortgage.

Personally, I dont think banks should have been allowed to do these as their products/investments were not good enough. However, the concept itself isnt flawed.

Typically, investment backed mortgages were cheaper than repayment mortgages. That was one of the most common reasons people did them. One of problems though, which you identify, is that when mortgage rates dropped along with investment returns, the monthly premium should have gone up. However, it didnt with most people on unmanaged arrangements.

Have we been well and truly ripped Off?

No. Just used low quality investments/products through a period when it was much harder to make money (not impossible by a long shot but needed more active management and a wider spread of investments than those used by woolwich).