Equity ISA's

ZhGCaT

I have been reading the forums about motgages etc and have seen Equity and Cash ISA's referred to quite a bit.

I need to replace an endownment policy on my mortgage and I get the impression that an Equity ISA is a good way forward. However I haven't a clue what one is!

I need to cover a mortgage of £120k with 20 years to run. I also have £7k to invest from my endowment.

Any advice greatly received!

EdInvestor

While equity ISAs are a Good Thing, you might be better to consider paying the 7k off the mortgage and then upping the mortgage payment by the amount of the endowment premium, so as to overpay it and reduce the interets payable over the term .

This will give you a guaranteed return at the same level as the mortgage interest rate, which is also tax free.

As you've already seen, taking risks with your mortgage can lead to trouble.Is it worth it, when a decent giuaranteed return not that much lower than the standard risk-based return is available if you proceed as above?

dunstonh

Equity ISAs are lower cost than an endowment and are more tax efficient. Those two things make them more suitable than endowments for investing on a regular basis.

However, investment risk still exists although the potential for future returns is much better with an appropriate fund selection.

I dont have many people on ISA linked mortgages but those that I do have are significantly above where they need to be at this time (basically what you were probably told what would happen with an endowent - and things can change). However, they are professionally managed and they have the risk profiles to go with it. If you dont have the risk profile and you dont know what you are doing then its best to stick with a repayment mortgage.

ZhGCaT

Thanks for the advice guys.

Ed .. could you give me an idiots guide as to how to calculate the overpayment I need to make so as to clear mortgage at end of term?

Supernova

Ed is suggesting overpaying the mortgage by whatever premium you were paying into the endowment each month, assuming your mortgage allows that.

The effect is the same as compounding that premium over 20 years. See how that calculates and you might consider putting in the amount of monthly interest that redeeming the £7K will save you too.

jamesd

An equity ISA is essentially a tax free way of investing in funds which invest in companies in the stock market. You select a mixture of funds that achieves your desired level of risk by choosing a range of funds to cover the various asset classes (business types and countries) available. You can adjust the fund choices and risk over time so you could start switching to safer investments in the few years before the mortgage becomes due.

If you want repayment mortgage payments for 113000 over 20 years at 5% the amount is 746 a month. At 5.5% it is 778 a month. About 275 over the interest payment, whatever that is at the time.

If you were happy with an endowment policy risk level you might consider using the equity ISA route or splitting between part equity ISA investment and part overpayments on the mortgage. Then you could review investment performance in ten years, knowing that half of the mortgage is definitely taken care of, so you will have time to adjust your plan if you find that is necessary.

Alternatively, equity ISAs are a good investment method and instead of using only all of the 275 in repayment mortgage money, 3300 year, you might consider using this excellent investment vehicle up to the annual limit of 7000 a year. That should give you good investment returns potential and ample margin to ensure that even in a poor market you have funds to pay the mortgage. 7000 is a per person limit so if you're married you could go higher by using your partner's allowance. After paying off the mortgage you can retain the rest of the ISA as part of your retirement planning.

If you don't like the risk or are not interested in choosing, monitoring and adjusting funds at least once a year, go with the repayment mortgage or overpayment on your interest only mortgage choice. It's certain to work and requires minimal monitoring. Definitely the easiest option!