Home finance
JOHN BULL
The time has come for me to sound a wa ing about second mortgages. It is not wro ' to take out a second mortgage on yo house but it is often dangerous. And just fthe moment an unusually large number firms are offering second mortgage facilit A few of these firms are first-class: th have been in business for many years are associated with important public co panies or big City institutions. The major] however, are a recent creation, cha you the earth without you realising and are ambiguous about such impor Considerations as the availability of tax 'lid. In one or two cases they will forecl without hesitation should you fall just month behind with your repayments, sell your house to regain their funds.
The basic formula is simple enough. Y can borrow 90 per cent of today's value your house minus what you already owe it provided that your income is sufficient cover the repayments. The usual rule that the total first and second mortgage re- payment must not exceed one quarter of your annual income. I cannot say how listk the house valuations are, but it is rnmon to count in your wife's income and rnings which accrue outside your main ployment when assessing ability to repay. If you need to take out a second mort- ge, what points should you watch? In the t place I urge you to check the creden- als of the lender. I have already mentioned he possibility of early foreclosure. It would so be embarrassing if the lender himself n into trouble and-was forced into liquida- n. On the face of it, that would not affect our arrangement; in practice, depending pun what the small print says, it might. Second, it is very important to establish rate of interest being charged, that is true rate, which is calculated on the educing balance of your loan. Rates aver- ge around 15 per cent per annum, but can very much higher. Unfortunately it is uite difficult to establish what rate of in- rest is being charged. For instance the rase '10+ per cent is charged on the open- g balance' might lead you to suppose that e true rate of interest was 10f per cent r annum. In fact, when re-calculated on e basis of interest payments related' to ount of loan outstanding, it is likely'that e answer will come out at over 20 per cent r annum.
It is even more difficult to calculate the e rate of interest from such information the following: 'assuming that the loan s for fa, this would be repayable in either ty monthly repayments of fx or 84 mthly repayments of Ey depending pen the period granted.' There are other ags. Some firms say proudly that there re no extras. Others boast about an ap- rently low rate of interest but make little the necessity of paying fees for the house cation, legal costs and stamp duties on e mortgage. Most companies insist that fe cover is obtained so that the loan i% id off in the event of death. Some lumii e fee in with your repayments, others rge separately. Mrs Margot Naylor has e some interesting calculations on the l cost of taking out a second mortgage blished in the Money Mail). They show at the total net cost as a percentage of e net loan (assuming tax relief, which I II deal with below) varies between 44 d 53 per cent for a five-year loan (that is tal costs over the whole life of the loan). But can you assume that you will get x relief on payments under a second mort- ge? Since the Finance Act for 1969 was • sed, you cannot. The rule is that tax re- will be allowed on the interest, provided loan is for a 'qualifying purpose', that is the money borrowed is for the purchase improvement of land or buildings ether owner occupied or let by the bor- er or where the loan interest is a proper ness expense. 'Improvement' it should noted is not the same as 'repair'. If you the proceeds of a second mortgage to if your roof that probably would not nt for tax relief. Mortgage firms often that they do not inquire what their loans to be spent on—but the tax inspector ake great care, therefore, when arrang- a second mortgage. Beware, even, of so- led mortgage brokers. Don't let them Ile you a penny until you have secured an. Look at as many schemes as possible ore making up your mind. Let your itor look over the small print. Only Ao,, You absoldtely have to.
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