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Newcastle brings out third property bond

Newcastle Building Society has brought out the third issue of its guaranteed property bond.

The bond works in a similar way to guaranteed equity bonds that are linked to stockmarket indices, but it is linked to the performance of the Halifax House Price Index for five years.

To calculate the final returns, the level of the House Price Index is recorded at the start of the term and again at the end. The bond offers up to 100 per cent of any rise in the index and guarantees the return of the original capital.

The bond can be held within an Isa wrapper and could suit people who want to invest in residential property because they have seen house prices increase rapidly. But they may be reluctant to take the responsibility that goes with renting out property.

It could also attract self-invested personal pension (Sipp) investors as a means of gaining some exposure to residential property, since Sipps allow investment in commercial property only.

The housing market has been booming due to low interest rates, low unemployment and a shortage of good quality properties to meet the demand from people who are moving home.

However, property prices have escalated beyond the means of many first time buyers. This could result in a slowing down of prices and could affect the returns from this bond.

In the five years between November 1997 and November 2002, the Halifax House Price Index rose from 226.2 points to 402.1 points &#45 an increase of 77.8 per cent. Although economists at the Halifax feel a substantial rise in interest rates is unlikely, they predict a slowdown in the residential property market over the next 12 months.


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