With all the hype surrounding endowment mortgage mis-selling, the concept of an equity-based mortgage has taken a real beating over the last couple of years.
Now many of those compensation claims have been settled and dealt with, questions are now being asked as to whether endowment and equity mortgages still have a future.
At present, it is unlikely consumers would choose to take out an endowment mortgage, given all the publicity. However, advisers suggest there are still a handful of clients who are prepared to take the risk of dabbling in the stockmarkets and consider an interest-only mortgage, such as a pension, Isa or endowment mortgage.
There are still one or two advantages to using Isa mortgages – the main one being the client can change the investment provider on an annual basis – but the disadvantages, particularly the investment risk, now seem to outweigh the positives.
Even if a consumer manages to pick successful investment providers for their Isa-able element of the mortgage, the products do not carry the protection add-ons some mortgages can offer, such as built-in life cover.
Moreover, the cost of taking out an Isa interest-only mortgage can be slightly higher than the potential investment returns now expected of the equity market, as charges on the mortgage can amount to around 4% as well as investment management charges of around 1.5%. Just meeting the charges alone means investment returns have to hit at least 6%, without even boosting the assets needing to grow.
And with changes announced by Gordon Brown to the Isa regime – cutting the maximum potential Isa investment per year from £7,000 to £5,000 from April 2005 as well as indicating the end of Isas by 2009 – it is unlikely investors could put away enough money to even cover a mortgage, unless they already had a substantial deposit.
All the indications now suggest equity-based mortgages are on their way out as the potential returns are just not safe enough to secure the repayments on a residential property. Gone are the days, it seems, when consumers can afford to take a punt on the gains they may make above their mortgage requirements. But a little more stability in the repayment of mortgages could eventually benefit the investment market elsewhere, as stable mortgage repayments could eventually support the pensions market which so desperately needs new liquidity ideas.
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