Free Essay

Personal Finance

In: Business and Management

Submitted By sabjoag
Words 1647
Pages 7
Personal finance
Assignment

Student Number
09005308

Question 1
a) Buying a house in the UK typically takes 12 weeks, which is twice the amount of time it takes in other developed countries (Home.co.uk. 2010). Home.co.uk (2010) is an independent property search engine and believes there are seven stages to buying a house, as shown below: 1) How much can you afford and get a mortgage agreement in principle - it is important to find out how much you can borrow to give you an idea of what type of house you will be able to afford. Also, speak to a mortgage advisor to find a mortgage that will suit you. 2) Choose your home – View several properties before choosing your home. 3) Hire a solicitor – the average cost for solicitor is £1060 (guardian. 2008), therefore get more than one quote from solicitors. 4) Make an offer – this is normally done through the estate agent. 5) Do any survey and valuations- many mortgages required you to take a variety of surveys and a valuation. 6) Exchange contracts- at this point you will normally exchange contracts and hand over a deposit for the house. 7) Finalise your contract details and move in
b) A mortgages process is a long process and can take between 6 to 10 weeks (shire direct. 2010). The process can also be very complex, therefore the Consumer Financial Education Body (2010) have spilt the process into four simple stages as shown below: 1) The first stage is to get advice from a financial advisor to find out which mortgage will be suitable for you and find out how much you can borrow. 2) The second stage once you have decided what mortgage you want will be to apply for the mortgage. At this stage, the Lender will want lots of evidence of income and financial circumstance so they can assess your application. 3) The third stage is when you application is assess by the lenders and there underwriters. This stage can take quite long depending on if the lender requires any more information. 4) The final stage is that the lender will give you a mortgage offer. You should make sure that you understand the offer and checked it is correct before you sign it.
c) The average house price in the UK in May 2010 was £165,314 (land registry. 2010). For this answer I will assume that I am the first time buyer has an annual income of £27000, savings of £45000 for a deposit and is buying a house valued same as the average house in the UK. In addition, I want a mortgage over 25 years. The first option I have is if I want an interest only mortgage or repayment mortgage. An interest only mortgage is where you will only pay the interest on the loan and repay the loan amount at the end of the term. This means that the monthly payment are simple and much lower, however the debt will not be paid off. This means I must ensure that my investment or saving plans are on track so I will be able to pay back the mortgage at the end of the term. On the other hand, with a repayment mortgage you will have to pay the interest and part of the loan every month, so by the end of the term the mortgage will be paid off. The monthly payments are higher but decrease as the mortgage decreases. The benefit of a repayment mortgage is that by the end of the term the mortgage will be paid off (moneysupermarket.com. 2010a). My next option is which type of mortgage is best suitable to me; three options are shown below provided by moneysupermarket.com (2010b).
Option 1
The first option is to have a fixed mortgage. A fixed mortgage is a mortgage where the interest rate is fixed for certain period during the mortgage. This means that the interest rate is not affected by changes in the base rate. However if the base rate decreases the rate I will pay will not decrease. The best mortgage available to me is Woolwich 2 year fixed mortgage. The rate is fixed at 3.59% then goes onto a 2.99% variable rate and the overall cost of the mortgage is £174683.77.
Option 2
The second option is to have a variable mortgage, which is a mortgage where the interest rate will change if the base rate changes. Therefore, if the base rate increases the interest rate will increase and mean that the monthly payments will increase. This mortgage can be very complex but means that you not fixed to a high interest rate. The best variable mortgage available is NatWest 3.75% variable mortgage and the overall cost of this mortgage is £186490.00
Option 3
The third option is to have an offset mortgage, which is mortgage that is combined with your savings. The savings account is used to reduce the mortgage payments by using the saving interest to offset the mortgage interest. This type of mortgage allows flexibility and there is tax benefits as the interest on savings are not taxed (Mortgage Guide UK. 2007). However, this mortgage relies on having large savings to offset mortgage interest. The best offset mortgage available is the first direct Offset mortgage, which has a variable 2.49% interest rate.

d) 69.8% of all household own their own property in 2009 (the guardian. 2009). The main benefit of buying your own property was the pride of have owning your own home. In addition, the cost of buying your own house is cheaper than renting in the long term in 74% of areas within the UK (Citywire.co.uk. 2010). In some areas such as Greater London, there was a 44% difference in the cost of buying a property and renting over 25 years (Citywire.co.uk. 2010). However, there are high short-term costs of buying a house such as stamp duty. Buying a property has been seen as a good long-term investment due the growth in house prices over the last 50 years and the high demand in the product. However, with every investment there have been periods were prices have gone down. Buying a house is a long-term financial commitment, which makes it difficult to move house. In addition, the process of buying is more complex than renting. However, with buying a house you have more stability as you cannot be forced to move as long as the mortgage has been repaid. On the other hand, if you are unable to repay the mortgage you will face large financial losses.
(Words – 1080)

Question 3
Income tax
(Earning per annual – personal allowance) £26000 - £6475 = £19525
(Income tax at basic rate of 20%) £19525 X 0.2 = £3905
(Monthly income tax) £3905 / 12 = 325.42
National insurance
(Monthly earnings) £26000 / 12 = £2166.67
(Monthly earning - lower earning threshold) £2166.67 - £476 = £1690.67
(National insurance at 9.4%) £1690.67 X 0.094 = £158.92

b) “Income tax is tax levied on almost all types of income” (Callaghan, Fribbance, Higginson. 2007. P-72). William Pitt the Younger first introduced income tax in 1798 in order to finance the British force, due to the huge debt collected during the war against the French forces (HMRC. 2008a). Income tax was introduced as a temporary tax and still is now. Income tax expires on the 5 April every year and “Parliament has to reapply it by an annual Finance Act” (HMRC. 2008b). The provisional Collection Taxes Act 1913 ensures that the tax is valid during the transition period of introduction the new Finance Act every year. The main purpose of income tax is to finance government spending in the UK. Income tax revenue accounts for 34.8% of the total government revenue in 2009/10 (Office of National Statistics. 2009), however it is expected to reduce to 27.4% in 2010/11 but the income tax revenue increase to £150bn from £142bn (HM treasury. 2010). Income tax is also used to redistribute wealth in the economy. This is because it is a progressive tax and means that the people with higher income are tax proportionally more than people on lower incomes. In addition, the revenue of income tax is used to help lower income households through benefits and support through the welfare system.
Income tax works by taking a proportion all your income excluding non-taxable income and personal allowances. You taxable income is income from employment, pension, investment, trading, interest or dividends. Some income such as income from ISA and winning from betting are exempt from income tax (Melville. 2010). Taxpayers are given personal allowances, which is an amount of income they can earn tax-free. The personal allowance will depend on your age and personal circumstances but the general personal allowance is £6,475. Any income above the personal allowance is called the taxable income. The amount of income tax you pay will depend upon how much taxable income you have. Taxable income up to £37,400 is taxed at the basic rate of 20%, any taxable income over £37,400 up to £150,000 is taxed at the higher rate of 40%, and any taxable income above £150,000 is taxed at the additional rate of 50% (HMRC. 2010). Income tax is collected and administered by HM revenue & customs (HMRC). Taxpayers who are employed and have only one source of income pay income tax through Pay as You Earn (PAYE) scheme. This scheme means that the income tax due is calculated and deduct by the employer from the employee wages or salary. However if the taxpayer has several source of income they will have to complete a self-assesmnet and submit it to the HMRS along with amount of income tax due.

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