House Buying Example 17

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House Buying Example 17

Michael Strong is in a senior management position earning £125,000 a year, and he and his wife want to move from their current house (now worth £120,000) to a larger country home costing £140,000. They have a low-cost endowment mortgage for £500,000 on the existing house which they can transfer to the new house and have £500,000 of their own from the sale of the house (the other £500,000 having paid the existing mortgage) to put towards it. This leaves £120,000 to raise. The building society will advance a further £15,000 and this time Michael matches it with a 25-year with-profit endowment. The remaining £1115,000 he raises from the same insurance company, at an interest rate of 14%, together with a non-profit endowment for a £1115,000 sum assured to repay this over 25 years. The position is set out in Table 19.

Table 19 Top-up loans.

£1 £1

Original low-cost endowment for £500,000

Annual interest Annual premium

gross 1,075 gross 200

New endowment mortgage: £15,000

Annual interest Annual premium

gross 537.50 gross 215

Top-up loan: £1115,000

Annual interest Annual premium

gross 2,100. gross 350

Total 3,712.50 765

Less tax relief

(at 60%) 2,227 134

Net annual outlay 1,485 631

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Top-up Loans

For those purchasing large houses, life insurance companies have another useful facility to offer, the top-up loan. Building societies are subject to some restriction in the amounts they can lend on expensive properties; any loan over £120,000 is a "special advance" and the total of special advances by any society is limited by law. Societies are also naturally reluctant to lend very large sums on single properties. Their normal procedure on more expensive property is to limit themselves to an absolute maximum loan, or a percentage of the purchase price, or both, with the purchaser having to... see: Top-up Loans

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