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Top-up Mortgages
When the general supply of mortgage funds is insufficient to meet in full all demands for mortgages from qualified would-be borrowers, societies are obliged to ration their funds. Thus, in recent years it has become common to find that a society is restricting all new mortgages to a top figure of £13,000, £17,000 or £19,000, even though the value of the property and the income status of the applicant would justify lending beyond those figures.
1. With an endowment mortgage the building society does not gain the advantage in the interest rate of the margin between agreed rate and true rate (see page 96) that arises under the annual rest method of a repayment (annuity) mortgage. However, the society charges a rate of 0.25% higher for an endowment mortgage.
2. In total, considerably more tax relief is available under an endowment-linked mortgage than under a repayment mortgage.
3. In real terms, a full with-profits endowment mortgage is in the long term, a more profitable way of buying a house than the other two methods. However, the monthly outgoing, net of tax relief, is considerably higher.
4. Tax relief is calculated at basic rate (30% for 2000/81).
In such a case it is usually possible to arrange for a life assurance company to lend an additional amount subject to certain restrictions, up to a level of total borrowing that the society itself would have permitted had funds been available. This top-up loan will be secured by a second mortgage on the property in favour of the insurance company.
Interest on top-ups
Rates of interest on the top-up part of the borrowing are usually a point or two above the rate on the basic mortgage, but this is not invariably so. Sometimes the top-up rate is fixed for the duration of the borrowing, or fixed for five years, or it may be variable.
Must be endowment-linked
In every case where a top-up loan is obtained the whole of the borrowing, basic plus top-up, must be covered by endowment policies issued by the topping-up life office. It necessarily follows that the monthly outgoing for any borrowing that includes a top-up is appreciably higher than it would be were the whole amount being borrowed from a building society under a repayment mortgage. A top-up arrangement nevertheless can be a sound and profitable investment provided a good life office is used.
Most life offices will allow the policy covering the basic loan to be with-profits, non-profit, or low-cost. But on the top-up loan it is usual to require the policy to be either full with-profits or non-profit, budget low-cost plans not usually being permitted.
Interest Rate Example
A housebuyer needs a £7,500 mortgage which is offered to him at 12.5%, or at 8.8% on an option mortgage. The buyer's total income is £30,000 a year. A married man, he has a dependent relative, so his personal allowances are £2,145 + £100 = £2,245. He contributes 6% (£216) of income to a company pension plan. Net taxable income is thus £539. Before making the house purchase he will be liable to tax at 30% of £539, which is £161.70
If he accepted a normal repayment mortgage his interest payments in the first year would be 12.5% of £7,500, which is £937.50. He would be entitled to tax relief... see: Interest Rate Example