Options: Homing in on the best loan

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The Independent Online
I have never had a mortgage and I want to borrow pounds 10,000 to fix the roof and carry out other improvements on my house. How should I go about getting the money?

Probably the cheapest route is a mortgage. Variable interest rates now stand at about 7.75 per cent APR, so a 10-year repayment mortgage would cost pounds 122.80 a month at current rates. Over 15 years, monthly payments are pounds 95.90.

Alternatively, you may wish to pay interest only. If so, assuming variable rates as before, monthly repayments would be pounds 64.58 irrespective of the period of the loan.

In that case you will have to consider putting some more money into an investment that will pay off the mortgage at the end of the term.

One common route is that of with-profits endowments sold by many insurance companies. Returns can sometimes be disappointing.

Increasing numbers of people are now plumping for tax- free personal equity plans.

PEPs, either in unit or investment trusts, are much more closely linked to rises and falls in the share index. You choose the level of risk in return for the possibility of more significant gains.

If you are near retirement, you could use part of any tax- free lump sum from your pension. If you opt for a mortgage, don't expect to get tax relief on your borrowings. Sadly, relief for anything other than a straight house purchase stopped in 1988.

There may also be a problem in that some lenders are wary about lending you less than pounds 15,000, the figure at which they have to comply with rigorous rules under the Consumer Credit Act.

If mortgages don't appeal, there are other routes. One is to borrow against a life insurance policy. Most companies will lend up to 80 per cent of the value of the policy to date at around 13-15 per cent APR.

Another is a bank or building society loan. But unless you can find a special offer be prepared to pay at least 13 per cent APR, even using your house as security, with 15 to 19 per cent more common.

Using a Gold credit card to borrow money is an option, although interest charges are dearer than at one time.

Finally, now that some building societies are slashing overdraft rates to as little as 9.8 per cent APR for current account customers, going overdrawn can be a good idea. But this sort of sum could be too much for your branch manager to swallow.

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