Mortgages with room for manoeuvre
Sunday 06 September 1998
Yorkshire Bank claims to be the first player in the flexible mortgage market, having introduced the concept back in 1994. Borrowers can opt to pay weekly, fortnightly or monthly and can choose the amount of capital to repay with each payment. One advantage is that you can reduce the term of your loan by paying off more capital sooner.
Interest is charged on daily balances. That means all capital repayments have an immediate effect on the interest you are charged. This contrasts with the practice of many mortgage lenders who base interest on outstanding capital on just one day a year. They take no account of capital repayments between the anniversary dates, or do so only subject to certain rules. As an example of its method Yorkshire Bank cites the case of a customer borrowing pounds 50,000 who repays monthly and increases the monthly payment by 2.95 per cent a year. Such flexibility lops nine years and seven months off a 25-year mortgage term and saves the borrower pounds 29,733 in interest.
But the flexible mortgage is not just for paying off capital early. Payments can be decreased as well as increased. A flexible mortgage may suit changing lifestyles and financial commitments and uneven income patterns.
In addition to the Yorkshire Bank (0800 202122), the Money Facts monthly guide to investment and mortgage rates lists a small but growing number of lenders who offer a flexible mortgage option. The list includes Bank of Scotland (0645 812812), Clydesdale (0800 419000), Legal & General (01372 364444), Mortgage Express (0500 050020), Royal Bank of Scotland (0800 121121), Sainsbury (0500 700600), Scottish Widows (0845 845 0829), Woolwich (0645 757575) and others.
Different lenders offer different features - for example, only some offer payment holidays. Some allow an increase in the debt for personal loan- type purposes. Three lenders have taken this idea to its logical conclusion and have in effect amalgamated current account, credit card account, personal loan account and mortgage into just one account. Virgin (08456 000000), Mortgage Trust (0345 743743) and Kleinwort Benson (0900 317477) all offer these so-called current account mortgages. These are real current accounts with all the usual facilities - standing orders, direct debits and cheque books. All your spare money (such as your regular monthly salary) can work for you by reducing interest charges until such time as it is spent. In a normal current account, credit balances may earn nothing or just a negligible amount. And even if you are organised and keep credit balances in a savings account, the saving of mortgage interest is likely to outweigh any after-tax deposit interest you can earn.
Flexible mortgages can be a boon to people who do want to make extra capital payments or whose income is irregular. But the financially ill-disciplined should probably steer clear of this area - they might end up never paying off their loans.
One downside to the flexible mortgage is that you do not have the full choice of discounted or fixed rates. However, some flexible lenders have combined a fixed- rate mortgage with a degree of capital repayment flexibility.
Tax on share sale
I have just bought some shares in the company I work for. I paid a reduced price for the shares using the proceeds of a save-as-you-earn savings account. I'm now thinking of selling the shares. What tax, if any, will I have to pay on the sale of shares acquired through an employee share scheme?
You bought the shares under an approved employee share option using the proceeds of a save-as-you-earn deposit account. With this sort of scheme, there is no extra tax to pay when you are first given the option and none when you exercise the option to buy shares for less than the current market value. There is also no tax to pay on the interest on the save- as-you-earn account. Those are the tax perks.
However, once you have exercised your option and bought the shares, they are subject to the same tax rules as any other shares. That means you will pay income tax on the dividends. If you are a basic rate taxpayer, your income tax liability will be covered by the tax credit that accompanies the dividend. If you are a higher-rate, 40 per cent taxpayer, you will have to pay an extra amount equal to the 20 per cent tax credit.
When you sell the shares, there is a potential capital gain tax liability. This is based on the difference between what you paid for the shares using your option and what you get for the shares. You will be able to deduct your selling costs from this gain.
If you bought for pounds 1,000 and sold for pounds 2,000 the chargeable amount is pounds 1,000 (This assumes you bought the shares after 31 March 1998. For assets bought before that date you may also be able to claim an indexation allowance). Let us say you pay a stockbroker or bank pounds 20 to sell the shares. Deduct pounds 20 from pounds 1,000 and you are left with pounds 980.
However, the first pounds 6,800 of all chargeable gains made in the current tax year are exempt from tax. Gains over this amount will be added to your taxable income and taxed accordingly (at 20 per cent, or 40 per cent on any amount that goes into the higher-rate band). You may be able to avoid a tax bill by selling just enough shares to make use of the current year's pounds 6,800 exemption and selling more after 5 April next year to use next (tax) year's exemption.
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 firstname.lastname@example.org. 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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