Readers' lives: Weighing up the variables
Sunday 21 June 1998
You have to do your sums and weigh up some unknown factors:
q Easily quantifiable costs can include administration fees, valuation fees, legal fees, and mortgage indemnity payments charged by the new lender, plus any closing fees charged by your current lender. However, lenders are keen to poach business from each other and some offer deals where fees are not too onerous and valuation costs are paid for by the new lender. Also, bear in mind that the higher your mortgage, the lower the impact of fixed-rate costs on your overall savings. To put it another way, it could be less cost-effective to remortgage if yours is a relatively small mortgage.
q Is there a tie-in to the mortgage? Do you have to buy insurance or other products (such as a current account) as a condition of the mortgage? You have to work out the extra cost of a tie-in purchase and deduct this from the overall saving.
q How does the new lender's standard variable rate compare with your current lender's standard rate? This could be a decisive factor if the new lender tends to have a higher variable rate (or a lower one). Normally you are charged the standard rate once the period of a discounted or fixed mortgage ends. If you pay off the mortgage within a few years of the special offer ending, you will be charged a hefty redemption penalty. But there are moves to ban this sort of penalty - a decision from lenders is due later this summer.
q If you are looking at a fixed rate, how much are you really likely to save over the period of the fixed rate? Mortgage rates have risen steadily over the past year, but there is an expectation that they are due for a period of decline. What is now an attractive rate could look distinctly uncompetitive in a year or so. Falling variable rates would eat into any saving you expect to make from a fixed rate.
The issue of possibly missing out on windfall shares if your building society lender becomes a bank is a tricky one. But if you hold out too long for a windfall that might not come, the value to you of that windfall could be wiped out by the higher than necessary mortgage rate you might be paying.
Ideally, you should find out whether your existing lender can offer a money-saving deal.
My widowed mother still lives in the house in London where she raised her family and where I grew up. We never thought of it being a posh address but it is now worth pounds 280,000. My mother also has building society accounts worth pounds 40,000. Now 85, she is concerned about inheritance tax (IHT). I've told her she shouldn't worry. Am I right?
Inheritance tax is notorious for hitting the wrong people. It can hit relatively modest estates, such as that of your mother. Anyone with serious money will usually find an accountant who can reduce or eliminate tax.
The nil-rate band is pounds 223,000 and there's a flat 40 per cent tax on anything above this. Your mother has assets of pounds 320,000, so she's pounds 97,000 over the threshold for IHT. A 40 per cent tax charge on this would come to pounds 38,800, assuming the entire estate were left to her children (rather than in tax-free gifts, such as gifts to charity).
That pounds 38,800 is a huge bill. But it is not one your mother will ever have to pay. Her heirs (presumably her children and grandchildren) will be the losers. Can you and your co-heirs live with this bill (arguably unfair and arbitrary) given that you will still get pounds 280,000?
Getting advice on complicated tax-saving schemes is expensive and these schemes could be invalidated by legislation or Budget changes. Worst of all, they could threaten your mother's security and control over her home and other assets. Suppose your mother gave her home to you with no strings attached. You would then rent it back to her at full market rent. What would happen if you were to die first, go bankrupt or get divorced (assuming you are married)? Your mother could end up with an unsympathetic landlord, with all the potential worries that brings.
By all means look into tax-reduction measures, but be aware of the pitfalls as well.
q Write to the personal finance editor, 'Independent on Sunday', 1 Canada Square, Canary Wharf, London E14 5DL and include a phone number, or fax 0171-293 2096, or e-mail email@example.com. Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.
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