Mortgage reversal from lighter relief: Gains on interest rates are likely to be wiped out

MILLIONS of borrowers are being sent details of their new mortgage payments to take into account Budget changes that reduce mortgage tax relief from 25 per cent to 20 per cent.

For homeowners with small mortgages, any recent interest rate cuts may be reversed by the reduction in tax relief.

Lenders say that on mortgages of pounds 30,000 or more, the change in mortgage interest relief will mean that borrowers will have to pay an extra pounds 120 a year.

Abbey National said it had calculated that on a pounds 30,000 loan the decrease in tax relief will be equivalent to an increase in interest rates of 0.4 per cent.

For those unmarried couples who raced to buy property in 1988, before the abolition of double tax relief, the change will be greater. The maximum annual increase could be as high as pounds 240 a year.

Abbey National is treating the change as it would any alteration in the interest rates and recalculating the amount owed by its 2 million borrowers.

For repayment mortgages, it is recalculating the total amount owed and working out new monthly payments. This means that if people have missed payments, they may end up with a higher monthly increase.

Tony and Naomi Balcam from Norwich have two loans with the Norwich and Peterborough Building Society. Their repayments are on annual review and they were looking forward to a decrease in April as the society had reduced the interest rate on both their loans from 8.55 per cent in 1993 to 7.89 per cent this year - a reduction of 0.56 of a percentage point.

Mrs Balcam said: 'We were somewhat stunned to find that the mortgage repayments on one of our loans remained virtually identical to the previous year.'

The couple had taken out their first loan in 1974 for about pounds 5,000.

They had decided to take out an endowment mortgage, where only the interest is paid off on a monthly basis.

On a rate of 8.55 per cent, the total amount paid during the year in interest without tax relief is just over pounds 400; 25 per cent tax relief would cut that annual payment by a quarter in this case to pounds 297.54, equalling monthly repayments of pounds 24.

On a rate of 7.89 per cent, the total amount of interest paid during the year without tax relief would be about pounds 376; 20 per cent tax relief on that amount would cut the annual total to about pounds 300 - monthly repayments of pounds 25.

The couple had a buildings insurance policy that was paid on a monthly basis with the Norwich Union. Adding the two premiums together, the Balcams ended up paying out exactly the same amount.

The Balcams also feel hard done by over the reduction on the second part of their mortgage.

In 1991, they took out a short-term repayment mortgage for about pounds 8,500. Since then they have managed to reduce the outstanding loan to pounds 5,640. The interest rate reduction means that the monthly repayment on their loans drops from pounds 105.84 to pounds 102.46.

The Norwich and Peterborough pointed out that on repayment mortgages that had only a very small amount of time to run, the vast majority of the ly bigger part of monthly premiums were used to pay off the capital, rather than the interest on the loan.

Therefore, any drop in the interest rate is not likely to have such a big effect on the monthly repayments.

Equally, the drop in mortgage interest tax relief will have a limited effect on repayment loans where there is only a short time to run.

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