Senseless mortgages

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The Independent Online
WHY has the idea that it is a good thing to have a mortgage for its own sake clung around for so long?

There are plenty of people about with more than pounds 30,000 worth of savings tucked away in a building society who are servicing a pounds 30,000 mortgage held solely for the tax advantages.

But the numbers have long ceased to stack up, and after next April, when the maximum tax relief available falls from 20 per cent to 15 per cent, having a mortgage for the sake of it will make even less sense.

Look at the arithmetic. Take a pounds 30,000 repayment mortgage from the Halifax - an interest-only loan would also need a savings scheme to repay it at the end of the term. With tax relief at 20 per cent the monthly cost at the new rate of 8.1 per cent is pounds 204.57. This will rise by pounds 7.74 in April to pounds 212.31.

That same pounds 30,000 put into the Halifax's three-year account paying 8.8 per cent gross (much better than you can find on any instant access or notice account) would produce pounds 165 for a basic rate taxpayer and just pounds 132 for a 40 per cent taxpayer.

So even before April's tax cut, the basic rate payer is nearly pounds 40 a month worse off, and the higher rate payer more than pounds 70 worse off than if the cash had been used to wipe out the debt.

This arithmetic counts for nothing if someone who pays off the mortgage then finds that they need to borrow money. Mortgage finance, because it is backed by your home, is the cheapest borrowing around.

So while paying off your mortgage - even right down to the last 1p - is one of the best investments around - don't do it if you think you might need funds in the near future.

There is no point repaying your mortage and then taking out a personal loan at 15 to 20 per cent APR at the bank to buy a new car.

But you might consider repaying it down to pounds 10,000 or pounds 15,000 to provide a safety net and cut your monthly outgoings.

Remember to check first with your lender if there are any penalties for early repayment - there almost certainly will be if you have a fixed- rate loan, or have pocketed cash from a cashback offer, or taken a special discount.

You should also ask when the optimum time is for repayments. There is usually one day a year when 'over payments' are credited to your mortgage account. So you might as well hang on to the cash until that moment rather than giving the lender an interest-free loan.

MOST banks and building societies have now raised their savings rates - just a touch. So it is a good moment to check the rate you are earning on your savings and look around to see if it is the best deal available.

Consider one of the (almost) instant access postal accounts. Birmingham Midshires, Northern Rock, Nationwide, Skipton, and Bradford & Bingley all run postal accounts that are worth checking.

FIRST DIRECT made a song and dance about moving from traditional banking to a telephone-based service, but gradually every other bank in the land is allowing customers to dial up their accounts.

Building societies like Alliance & Leicester have joined in and so have insurance companies, following the lead of Direct Line.

Now the Inland Revenue is getting in on the act. It is running a pilot tax helpline in Norwich.

The Revenue is gearing up to try to be more approachable, ahead of the launch of self-assessment that will plonk more responsibility into the lap of taxpayers. It should be less confrontational, with the Revenue just there to check that the arithmetic is right and there has been no cheating.

But most people will be wary, and a friendly soothing voice on the end of the telephone could make all the difference.

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