House Purchase Alternatives

THE facilities that are now available to house purchasers are very favourable ; just how extensive they are, however, is not yet generally recognised. There is a tendency on the part of the borrower to negotiate for a mortgage before considering the various alternative schemes, with the result that an arrangement unsuited to his particular needs may be decided upon. It is true that the Building Societies are beginning to draw the attention of prospective borrowers to more than one method of house purchase, but it cannot be expected that a complete analysis will be presented. In the at sence of such analysis a person who is unfamiliar with the subjects of mortgages and life assurance will find it a difficult task to make a wise choice.

It is incorrect to maintain that any one particular plan is the best. Each has its advantages and disadvantages and until a person's individual circumstances are studied no selection should be made. The best time to examine the relative details is obviously before the decision to buy a house is made, ut if the realisation of a plan superior to the one adopted comes subsequently, or should the owner's circumstances alter so as to mike a scheme other than the one selected more -suitable, then it is advisable to consider rearranging the mortgage. This can be done in some cases without undue inconvenience or expense.

REPAYMENT MORTGAGES.

The- ordinary building society mortgage can be arranged over any period from five to twenty-five years and requires level monthly repayments including principal and interest. The . advantages consist of simplicity, economy, and the avoidance of a complicated position in the event of the sale of the property. It is not necessarily the most economical method when the total cost over the period is compared with the total net cost of other schemes, but it is economical in the sense that the money to be found in the early years is usually less than that required under alternative arrangements, and this is a vital consideration to many borrowers.

A possible disadvantage lies in the fact that the dependants of a mortgagor who dies during the mortgage term must continue the monthly repayments or make a forced sale. In the case of a young married man, the position is particularly unsatisfactory and clearly justifies examination of the various means by which the mortgage can be supported by life assurance.

Another point in connexion with the ordinary repayment mortgage that is frequently overlooked is tax on the property. In the early years of the mortgage, the amount of interest included in the repayments may equal or exceed the assess- ment value of the house, so that the owner will pay no tax. Gradually, the proportion of the repayments applied to reduce the amount of principal outstanding increases and the imount of the - interest becomes less each year until the borrower. must pay an increasing amount of tax each year.

THE APPLICATION OF LIFE ASSURANCE.

There are at-least four ways in which lifeassurance can be used in conjunction with the building society repayment mortgage. The ordinary whole life- policy for the amount of the loan can be recommended since the assured has several valuable options. Cover can be continued as long as he wishes ; alternatively, a " paid up " policy can be taken, or the policy can be surrendered for cash. On the other hand, the premium will be comparatively high and the sum assured, after the first year of the mortgage, greater than the amount of the mortgage outstanding. Another table of life assurance that is particularly appropriate is that which provides a sum, payable at death, corresponding to the amount of the outstanding debt. This is known as " decreasing term assurance " and can be paid for by a single premium. Building societies are usually agreeable to advance such single premium, thus slightly raising the amount of the monthly repayments. This temporary cover can also be arranged by annual premium, which- decreases as the sum assured decreases. Ordinarily, - temporary assurances never acquire a surrender value, and no return whatever can be made on survival of the term. A recently- devised scheme, however, not only gives cover against death during the selected term for the amount of the out- standing mortgage, but also guarantees on survival of the term the return of the premiums paid. In addition, the advantage is secured of level premium payments. This is made possible by the combination of two distinct classes of assurance, namely, " decreasing temporary " and " pure endowment." The moderate premium required is evidently due to the exceptionally favourable rates for these two tables that are a feature of the particular Life Office concerned.

ENDOWMENT ASSURANCE HOUSE-PURCHASE SCHEME.

This scheme justifies strong advocacy in certain circum- stances. The maximum advantage can be obtained only by those who, being first-class lives, continue the contract for the contemplated period and are liable to tax at the full rate. The following comparison will be self-explanatory : (a) Building Society. s. d. Level repayments, for 20 year Mortgage of £500, t2j10% per month—

Amount paid per annum .. 38 ro 0

Total amount paid in 20 years 77o 0 0

(b) Assurance Company.

20 year £50o endowment assurance, with profits,

age 35 next birthday. Annual premium • • • • Ds ro 0 Less income tax at 2S. 6d. in the

3 3 9

22

6 3 Interest £5oo at 41%, gross

.. 22

I0 o Total per annum 44 16 3

Total in 20 years

8)::). 5 0

Les; Bonuses under Endowment Assurance 233 0 0

Net cost

696

5 o Under the assurance company scheme the greatest advantage is the cessation - of all Payments- in die- event. of die death of the borrower ; it must be conceded too that ultimately it is cheaper, simply because the endowment assurance policy, which fulfils the function of repaying the loan is, by virtue of income tax relief, obtained at a low cost ; whereas for every pound advanced by the building society a pound must be paid back. One might point to loss of interest on the amount by which the annual expenditure under (b) exceeds (a) but against this must be set two further advantages which the assurance company scheme possesses. The first is that since the advance is by way of standing mortgage, the interest remains the same throughout the period and less Schedule A tax will therefore be paid by the borrower. The other point is that the building society advance will most likely be subject to a higher rate of interest should the Bank rate rise ; the rate of interest for an advance made by an assurance office, however, is usually subject to no revision.

In conclusion it may be said that, between them, the Life Assurance Offices and the Building Societies offer an extremely ,wide and useful service in house purchase facilities, but in order to derive the greatest amount of benefit from those 'facilities, the various alternatives that exist must be gone into