Previous Page  453 / 822 Next Page
Information
Show Menu
Previous Page 453 / 822 Next Page
Page Background

GAZETTE

SEPTEMBER 1988

Housing Finance

Up to relatively recently questions w i t h regard to the " b e s t " home

loan were o f t en of academic interest. With mortgage finance in

short supply f ew people had the luxury of choice. The cost of the

mortgage came second to the problem of getting it. Many people

were, or would have been, willing to pay a little extra interest simply

t o get a loan, but even that choice was not always open since most

of the building societies charged the same rate in any case. All that

has changed — changed dramatically. The borrower can now shop

around — lenders are vying w i t h one another for the business -

and in addition to a choice of lender, the borrower has also a choice

of loan type, most particularly between the traditional " annu i t y"

mortgage and the " endowmen t" type mortgage. The market for

mortgages has become a buyer's one.

The would-be borrower has now

a lot of choices to make and

unfortunately there are no definitive

an swe r s. At p r esent bu i l d i ng

society loans are cheaper than

bank loans but will that continue to

be the case for the full t wen ty

years or so over wh i ch the loan is

being repaid? The answer is

possibly " y e s ", but it is impossible

to be sure. Will an endowment

mortgage work out better than the

traditional type. The answer is

possibly " y e s ", if the borrower is

paying reasonably high tax and

picks the endowment insurance

policy w i th care. But again, it is

i mp o s s i b le to be sure. The

endowment policy may not perform

well, there could be a change in the

current tax relief situation.

The best that can be done is to

take an educated guess on the

basis of the present situation and

likely trends in the medium term.

That wou ld seem to point to

bu i l d i ng soc i e t i es rather t han

bank s.

W i t h

less

c e r t a i n ty

endowment mortgages are likely to

prove a better bet for people paying

tax at above the standard rate. But

it is important to choose the

endowment policy w i th care.

Let us have a look at the reasons

for those conclusions in some more

detail.

The accompanying table shows

the declared interest rates, and,

more importantly, the repayment

rates currently applied by the big-

four banks and main building

societies. It will be noted that the

dec l a r ed i n t e r est rate is not

necessarily a good guide to the

actual cost of the loan. The new

law requiring lenders to declare

comparable Annual Percentage

Rates (APRs) is still not fully

ope r a t i onal w i t h t he bu i l d i ng

societies still disputing what should

be included.

Before looking at the initial banks

and building societies let us have a

By

C o l m Rapp le

look at the broad choice between

t he

t r a d i t i o n al

" a n n u i t y "

r e p a yme nt me t h od and t he

endowment mortgage. With the

t r a d i t i o n al

mo r t g a g es

ea ch

repayment includes t wo elements

- an interest payment and a

payment off the sum borrowed. So

the amount owing progressively

reduces over the term of the loan.

With an endowment mortgage only

the interest is paid off the loan but

in addition premiums are paid on an

e n d o wm e n t i n s u r a n ce po l i cy

geared to yield enough at some

time in the future to pay off the

loan.

With the endowment mortgage

the borrower can get tax relief on

the interest payments and on half

of the premiums and it should

remain unchanged for the term of

the loan - assuming no changes

in interest rates or in the law. Wi th

an annuity mortgage the tax relief

goes d own as the interest portion

of repayments reduce but that

reduction is not significant during

the first ten years or so of a t wen ty

year loan.

But there are some points to

watch:

Many endowment loans are

sold on the basis that the policy

will not only yield enough to pay

off the loan but can also provide

a surplus lump sum. So they

can. But if the borrower also

wants to save, it is best done

sepa r a t e l y. The re is less

flexibility when savings are tied

in to the mortgage repayments

The performance of endow-

ment policies can differ greatly.

There is no guarantee that the

proceeds will be enough to pay

off the loan but the " w i t h

profits" policies most commonly

used are relatively risk free in

that they can not collapse in

value and bonuses once added

in are usually secured. The unit

linked policies used in some

cases do promise a chance of

higher returns but they are also

vulnerable to a down t u rn in

value - another crash?

All the borrower needs is a

policy wh i ch will pay off the

loan. He or she should not be

influenced by thoughts of extra

l ump s ums. Any

s a v i ngs

decisions are best kept separate.

While unit linked policies offer

the prospect of higher returns

they are riskier than straight

forward endowment policies. Of

the endowment policies the best

performers have been " w i t h

profits" policies of the British

mutual societies - companies

like Standard Life. No r w i ch

Union and Friends' Provident.

Tax relief on life insurance is

allowed at 50% of the premiums

subject to a maximum of £1,000

premiums per individual. If a

person has already got some life

insurance, or is taking out a large

loan, it not too difficult to go

over that limit.

So let us have a look at who is

offering wha t:

BIG FOUR BANKS

All the banks are now very actively

promoting home loans.

All but the Bank of Ireland

charge an initial arrangement fee of

V/2% of wh i ch 1% is returned

when the security is perfected.

215