Re: How to finance my house purchase.

> >> "Tim" wrote:
> >> > But no interest is being earned on it!
> >>
> > "Ronald Raygun" wrote
> >> Yes it is, even though the bank claim not to be paying it.
> >> The effect is that income stream which would have serviced
> >> interest charges is instead free to accumulate, and it will
> >> do so at the same rate as mortgage rate. Therefore at the
> >> end of the day your net worth will be the same as if the
> >> savings account had paid 5.5% net, and therefore it *has*.
> >
> "Tim" wrote:
> > What *actually* happens, is that you pay (say) £4.4Kpa
> > interest on a £100K loan a/c, and get £0Kpa (net)
> > interest on a £20K savings a/c (the "actual situation").
>
"Ronald Raygun" wrote
> Well, what actually happens is that you pay £4.4k pa full stop.

Exactly. The "full stop" bit means that you don't *receive* any interest.
You just pay the £4.4Kpa.

"Ronald Raygun" wrote
> It is a truism to say that £4.4k happens to be 4.4% of
> £100k, but that's about as irrelevant as would be noting
> that it also happens to be 8.8% of £50k, or 0.44% of £1M.

Agreed. The only thing that matters is the *amount* of interest, not the
percentage/algorithm used to calculate it.

"Ronald Raygun" wrote
> In point of fact the net indebtedness of the account holder
> to the bank is £80k, and their published interest rate is
> 5.5% pa, and *that* is the reason he pays £4.4k pa.

It's not *only* those features you mentioned - you also need to take into
account the way the percentage is applied to the balance. For instance,
whether interest is accrued/applied/compounded,
yearly/monthly/daily/continuously etc. Which is why all that the taxman
does, is look at the *amounts* of interest that have been paid. He doesn't
bother with the different percentages or algorithms...

"Ronald Raygun" wrote
> If the net indebtedness is *presented* as two accounts
> instead of just the one, then clearly there is a risk of those
> separate accounts actually being deemed by IR to exist.

Yes, but fortunately when HMR&C look, they can see that one account has no
interest added to it (the 'savings' a/c), and the other a/c only has
interest charged (the 'loan a/c').

"Ronald Raygun" wrote
> Obviously, if the bank really did run two separate
> accounts, a loan of £100k and savings of £20k,
> and if it did charge 5.5% on the loan account and
> if the net amount of money due in were £4.4k pa...

That's all correct. But, just as the bank is allowed to choose it's method
of applying interest (accrued/applied/compounded, yearly/monthly/daily etc),
they're also allowed to choose what balance they apply the rate to. They
choose the **offset balance**.

So loan a/c is charged 5.5% of £80K, which is £4.4K.

"Ronald Raygun" wrote
> ... then the loan account must be paying 5.5% net.

Did you mean "savings" a/c here?
True, the loan a/c does charge 5.5% (of offset balance).
But the savings a/c pays ZERO!

"Ronald Raygun" wrote
> That's why it's safer, from the point of view of escaping assessment
> for deemed credit interest, not to have dual presentation...

Hmmmm. You're suggesting that it's the dual presentation that's the
problem?
You think that HMR&C should work out an equivalent single interest rate
which explains all interest being paid & received over the two accounts?
OK...

Suppose someone has a "standard" mortgage loan for £100K, charging 5.0%, and
a savings a/c holding £20K paying 3.0%.
So, interest paid on the loan is £5.0Kpa and interest received on savings is
£600pa [net payment: £4.4Kpa].
You're suggesting that HMR&C should come along and say "excuse me, your 'net
indebtedness' is £80K, and you're paying net interest of £4.4Kpa so that
must be 5.5% on both of the loan & the savings. Please pay us tax as though
you were actually receiving £1,100pa on the savings a/c, not £600pa!"

*Is* that what you're suggesting?



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