Which mortgage is best for me?

Q My fiancee and I are wondering about what type of mortgage we need.



At the moment we are both working and could afford a ?290,000 mortgage and still have cash to spare. However, if we decide to start a family, change jobs, or if interest rates go up, things would get tighter. We would like to use the extra cash we have at the moment to help us out if things do get more difficult.



My gut feeling is that we need to fix or cap our mortgage and invest in an Isa with tax savings of 40% for our income bracket, instead of the tax-free 5% savings that a flexible mortgage offers. What do you suggest?



Finally, if I need to cash in my Isa, what are the penalties?



SM



A It sounds as though a flexible mortgage would be ideal to meet your needs. The cost of borrowing can be significantly reduced if you have substantial savings to offset against the loan and you would be free to increase the mortgage up to the agreed ceiling, if you later need the extra money.



I agree that it is a good idea to consider a fixed rate, or capped, mortgage with the present upward trend in interest rates. Unfortunately, many people have taken the same view and the cost of fixed rate loans is rising, encouraged by increasing demand. If you want a sizeable mortgage, it makes sense to arrange this while you are both earning. The interest earned on the surplus savings will earn a better rate than elsewhere since you are basically receiving the equivalent of the mortgage rate.



Be careful, however, to check the terms of the mortgage since there can be all kinds of hidden provisions and penalties. Flexible mortgages tend to be more expensive than conventional loans, and there is a danger of borrowing more than you really need.



I don't understand your point about Isas. There is no tax relief on investments into an Isa. Their big attraction is that you can withdraw money without any liability to capital gains or income tax. In other words you get tax relief on the way out, not the way in as with pensions.



There are normally no penalties on withdrawing money from an Isa. However, like any other investment, apart from cash, you tend to lose out if you withdraw money after a short period, since you suffer from the bid/offer spread - the difference between the buying and selling prices.



Isas also have the same risk profile as other investments, and their value can go down, as well as up. There is a maximum investment of ?3,000 a year in a "safe" mini cash Isa, which means there is restricted potential to earn tax-free interest.