BUYING A HOUSE

A house is probably the biggest item of expenditure most people ever have and the majority have to borrow money to pay for it. Loans are made by Building Societies. As they have far less risk to run than a Hire Purchase Company, they can afford to charge a lower rate of interest and do charge it on the outstanding loan. The main structure of a house is after all relatively indestructible and the Building Society will insist that you insure it. A loan on a house or property is called a 'mortgage'.

The Building Society estimates the value of a house and will generally lend up to 80 % of their valuation on a new house and 75 % on one over 30 years old. The loan may be increased to 90 % or even 95 % if suitable guarantees are available. Each month the same sum is paid; part of this is the interest on the outstanding loan and part is the repayment of the capital. The rates of interest normally vary from 6 to 8-5 % p.a.

If, for example, Ј100 is borrowed for 10 years then Ј1-45 is paid back each month for 10 years. In the first month, Ј0-64 of this is interest, that is 71 % of Ј100/12, and Ј0-81 repayment of the loan. As the months pass, the proportion of interest reduces until in the last month, practically all the payment is repayment of the loan. The income tax authorities at present allow the interest part of the payment to be charged as an allowance against income tax. The effective payments especially at the beginning are then appreciably less than shown.

Exercise I

1. Suppose you wish to buy a house costing Ј6000 and you pay cash of Ј500 and borrow the balance. Use Table 3 to determine how much you would have to pay per month over a period of a) 10 years; b) 20 years.

2. If the real value of your house does not drop what would be the value of your Ј6000 home 10 years later? Assume the purchasing power of the pound varies as in Figure 3.

3. A house costing Ј800 in 1936 was worth about Ј4000 in 1964.

a) Use Figure 3 to find what the Ј800 would have amounted to if invested in a Building Society paying a tax free interest of 4 %.

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HIRE PURCHASE	\|	INCOME TAX

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