MORTGAGES
A matter of some interest
R. A. CLINE
Mr George Brown has been 'setting the record straight', telling us what he really said about low interest rates on mortgage loans. Have you ever noticed what Mr Roy Jenkins said in the Finance Act 1969 about the in- terest you are paying on your mortgage loan? What follows in this article will be of no interest (or perhaps concern) to you unless you are earning £2,500 per annum or over and you expect to earn more because you are part of that dynamic, talented, polytechnic electorate to whom Mr Wilson once addressed himself way back in 1966.
In other words you are a doctor or a printer and you have borrowed £5,000 from a building society to buy a roof over your head. Have you not noticed a distinctly un- comfortable change recently when writing out your cheque for your mortgage interest to the building society? You are paying more although the rate of interest has not changed (recently). How and why did the change happen? Even lawyers seem not to have noticed that by the enactment of a short but effective section in the Finance Act the Chancellor made life harder for mortgagors paying their half-yearly interest and put a tidy sum into the coffers of the building societies.
Let me explain how it worked in the golden period before 1969. When the borrower came to pay his half-yearly instal- ment of interest, he was entitled to deduct tax from the total sum which he had to pay. In other words he paid the net sum due. Sup- pose you borrowed £5.000. At 8 per cent you were obliged to pay £400 per annum in the way of interest, say £200 for each half-year. But from this sum you were entitled to dock off the tax at the standard rate. So you wrote out a cheque for some £112 each half-year and then when you came to prepare your in- come tax returns, you were allowed relief for this interest payment. At the other end of the bargain the building society received in the year your two half-yearly instalments totall- ing £224. The society never saw the £400 which was the gross interest due, only the net sum.
But in 1969 the Chancellor changed all that. What he did was to provide that in future the building society's borrowing customer should pay the gross instalments, ie the full £400 per annum without deducting tax. Then it was up to the borrower to claim the tax relief he would be entitled to on the gross payment. In other words the borrower is to be out of pocket to the extent of his gross payment of £400 for about eighteen months, for it will take him all of that time to settle his affairs with the overworked tax inspectors.
Meanwhile back at the building society there are celebrations. Multiply £400 a few million times and the result is a rich windfall. The building society is getting £400 where it used to receive about £2204 and it will similarly be about a year before the society has to pay income tax on that. In the mean- time the money can be usefully invested.
Who is most hurt by this change? Cer- tainly not the very rich whom it will affect only tenuously. Certainly not the Pave wage
earners. That leaves the blue riband belt of the ambitious, the talented, the young, the risers who will pass it on to the consumer in salary and wage claims. Who benefits? Clearly the building society whose income is almost doubled by the legislation, and the Treasury to whom the building society will be paying its income tax.
It is all really very simple but we shall not hear arguments about the Income Tax 1962 or the Finance Act 1969 at the hustings. The difference between 'gross' and 'net' is un- promising election material. But surely some of those members of the electorate who are buying their own houses on a mortgage must have felt a twinge of pain in the pocket when the 1969 Act first began to bite. Or has Mr Wilson's anodyne campaign rendered us anaesthetised from pain? It may be so. For, as Alexander Pope nearly said, universal suffrage buries all.
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