Chapter Eleven

BORROWING

'Who goes aborrowing goes asorrowing', threatens the old saying. 'Better go to bed supperless than rise in debt'. Nowadays we flourish our credit cards and laugh.

Those warnings arose in the days when prison doors yawned open for debtors. Most of our prisons were built, not for murderers and rapists (they suffered different punishments) but for unfortunates who fell into debt.

And if you puzzle how anyone can possibly haul themselves out of debt again while languishing in prison, the law at last agrees with you. No judge condemns you to gaol for debt nowadays - at least not in Britain.

The wheel has turned full circle. Our whole economy is based on the assumption that people will borrow. If everyone decided to repay tomorrow and resolved never to borrow again, the dole queues would stretch to the coast. Besides, borrowing marries up people with plans and people with cash; it joins the inventive, the progressive and the dynamic with those who just want a quiet life and some extra income.

Like everything else, there are ways to borrow and ways not to. (The prospect of credit cards for children, which they already use in the USA, terrifies me.) A life of debt is no picnic. Lending also demands skill, so you will find a hint or two on that at the end of the chapter.

We touched on borrowing in Chapter 7 - when you should consider borrowing and when not. We looked a little at interest, what it is and how to calculate it. Then we mentioned plastic money (credit cards and the like) and hire purchase. Finally, we said most lenders demand security and perhaps even a guarantor.

Here we take a quick peep at borrowing generally to fill in the background you need. Then we consider how to borrow successfully. Next we investigate borrowing for the most popular reason of all - to buy a house or flat - with a few hints on successful buying and selling. Finally, there's a word on how to lend money.

BORROWING GENERALLY

If you try to borrow, say, to start a business or to buy a car, the first thing that will surprise you is how many sources of borrowing you can choose from.

WHO ARE THE LENDERS?

You might approach your family, friends or workmates. Some employers operate loan schemes. If you are a member of the Afro-Caribbean community, you will probably know about the flourishing credit unions that exist to link up savers with borrowers. These are mutual concerns. This means that only members can lend and only members can borrow. The face-to-face commitment makes borrowers try harder not to let their lending friends down.

Further afield, you can pick and choose between banks galore. Many building societies offer second mortgages. They attract people who are well on the way to buying their home outright and can afford to increase their borrowings. That is, their incomes have risen so much, they can now repay a second mortgage without straining their budget. More and more, the building societies place no limits on how you choose to spend the second loan.

Open a newspaper, and advertisements entice you to borrow. Step inside a shop or show-room, and the sellers will hasten to arrange a credit sale with their associate credit company. You can even carry your tiara to the pawn-shop for a loan.

The next surprise is how widely lenders vary in the conditions of borrowing and the interest they demand. Conditions and interest vary not just from one lender to another but even with the same lender, depending when you ask for the loan. Why is this?

The difference between one lender and another often depends on what they think of you - not as a human being but as a potential borrower. If they expect you to run into difficulties and not be able to repay them, they will refuse to lend at all. Or if they do lend, they will demand more interest and security.

WHAT CAN I USE AS SECURITY?

A valuable back-up as security may be the deeds of your house if you don't have a mortgage. Remember, though, that if you cannot repay the loan as agreed, your house may be seized and sold. The lender may require references, like a letter from your bank to confirm that you are a reliable customer, or from your employer. Sometimes they ask for evidence that you have orders lined up for your new business venture. Or the letter offering a fortune for your masterpiece will serve as security.

You can use other odd things as security for a loan from certain lenders. You can borrow on 'expectations' if you know someone is leaving you money or goods in their will. Or you can borrow on the strength of a life assurance policy (see Chapter 10). This is guaranteed money, but expectations are risky. Uncle Albert may change his mind and his will, or live to be 110. So the interest rates will be higher. If Uncle Albert does cut you out, you are saddled with debts and no prospect of paying them.

Lenders who suspect that you are a high-risk borrower may insist on a guarantor, and the interest rate will be high. So the better the impression you can make on the lender, and the more firmly you can convince them you will succeed, the cheaper it will be for you to borrow. We look at this again below.

A lender who was enthusiastic to lend three months ago may act coldly when you visit him again. Don't take this personally. Market conditions change.

When interest rates rise, people grow keener to lend, even to more risky customers. They stand to make high profits. Besides, fewer people come forward to borrow because the cost is so high.

When interest rates are low, the opposite happens. Lots of people want to borrow, but lending earns less profit.    Lenders can pick and choose, so of course they choose the safest. This is the rules of supply and demand at work again.

DIFFERENT WAYS OF BORROWING FROM YOUR BANK

Suppose your lender is the bank and you ask to borrow money to install a jacuzzi or an exercise bench. The bank manager might be unwilling to lend through an overdraft or bank loan. He might be keener to steer you to an associated hire purchase company or give you a credit card to use instead. Why? Because they will squeeze more money out of you that way. So how you want to borrow will influence the bank's response too.

WHAT IS THE REAL INTEREST RATE YOU PAY?

Interest rates used to be simple. Everyone quoted the yearly rate, say 12 per cent p.a. and you paid back your borrowings at the end of the loan. If you borrowed £100 on 1 January at 12 per cent p.a., you repaid £100 capital and £12 interest, total £112, on New Year's Eve.

But then lenders suggested regular repayments by instalments and started quoting monthly or quarterly interest rates, because they appeared lower and so more attractive than annual ones.

You might expect 2 per cent a quarter to equal 8 per cent p.a. because there are four quarters in a year. In fact, it works out at 8.25 per cent, rather higher.

Many credit cards demand 2 per cent a month. If you tried to work it out, you might expect it to equal a horrific 24 per cent p.a., because there are twelve months in a year. You would rarely consider accepting that rate if the bank suggested it to you. In fact, the true figure looms even worse - 26.8 per cent. It means that you pay more than a quarter of what you borrow in interest, every year. Four years like that and you have paid as much in interest as you borrowed in the first place.

THE ANNUAL PERCENTAGE RATE (APR)

So many confusing rates befuddled and misled people that the government stepped in.   It laid down a method of calculation and insisted that all advertisements must also show clearly a second rate (A.P.R.) which is always calculated the same way.

Always look for the A.P.R. and use it to compare one lender's terms with another. It exists to help you. In the example I gave in Chapter 7, the A.P.R. would have warned you that an apparent 10 per cent really worked out at 18.46 per cent.

Another trick of lenders is not to tell you the interest rate at all. They simply say how much you have to repay each week or month. This way, not even a maths genius can work out how high the interest rate is.   It is quite impossible. You need to know how many instalments you have to pay as well.

Many people, sadly the poorest and worst-informed, just consider the amount, decide they can afford to pay it and forget they will be stuck with paying it for years, perhaps for ever. If the weekly or monthly repayment figure screams at you first from the advertisement, beware. The interest rate is probably gigantic.

Broadly speaking, if you can borrow from your bank, they will offer you the cheapest deal. Why? Because they know your history, so you appear less of a risk to them - especially if they already receive your salary every month. They will also offer advice and not let you borrow beyond any hope of repayment.

Money-lenders feel no responsibility for the difficulties you land yourself in. They may well seize   your goods because you fall behind with the payments.

EXISTING DEBTS - AND REARRANGING THEM

The warning against loan-sharks above applies more than ever if you are already floundering in a sea of debt and want to 'rearrange' them.  That is, instead of writing out and posting separate cheques on different dates for the stereo, the TV set, the car, and all the other debts you have run up, you pay one regular sum which covers the lot. You are likely to pay far less if you set up this 'rearrangement' with your bank than if you do it with any other organization.

BANK LOANS AND OVERDRAFTS

Bank loans are cheaper than hire purchase and lease purchase (both explained below). However, banks are often reluctant to lend money to buy cars. They have no security.  If you borrow from a hire-purchase company, it owns the car. If the worst comes to the worst, and you cannot repay,  it takes the car away (repossesses it). Then it sells it to pay off your debts.

Bank overdraft facilities come even cheaper than bank loans. You must agree an overdraft with your bank in advance. The manager allows you to withdraw or pay out more money than you actually have in your account, up to a certain limit. This can turn out cheaper than a loan, because you don't start paying interest until you actually spend the money. Then, you only pay interest on what you actually owe at the time. With a loan, you pay interest from day one on the full amount, whether you have spent it or not.

Sometimes, you can agree, later on, to extend your overdraft. The manager will increase your overdraft limit to allow you to draw out more, should you need it.

CREDIT CARDS

People like to use credit cards and charge cards because they are easy and convenient, especially when you are travelling in the UK or abroad. Besides, you don't need to ask anyone's permission to borrow.

You pay high interest, plus in some cases an annual standard charge. You can run up large debts        regardless of your means and can suffer a shock of someone steals your card and uses it. (Or simply gets hold of its number and uses it to buy by telephone or the internet.) Credit-card thefts abound. Professional thieves would often rather filch your credit card than your cash. Frauds are rife. Never, never give your credit card number to anyone, especially over the phone if it was not you who telephoned them.

Or an insecure internet site. A secure internet site's address always starts https//  Note the s for secure.

And never ever give it in an email.

Make sure other family members can't find it out either.

Try to keep the number you possess as low as possible. The more cards, the more scope for muddly overspending and the harder it is to keep track. One Devon suicide was trying to juggle 120!

PAWNBROKERS

Borrowing from pawnbrokers carries one big advantage. They still lend on the sort of securities other organizations refuse to touch - jewellery, watches, a stereo, golfclubs, even gym equipment. I heard of one man who repeatedly pawned the spare wheel of his Rolls-Royce! Nor surprisingly, pawnbrokers' loans turn out expensive, and you run the risk of losing your cherished pledge.

Two final words of warning on borrowing in general.

Never borrow to invest. (This is a male failing - women usually have more sense.) Why? The opportunities where you can really borrow here at 10 per cent and invest there at 11 percent, making an instant profit using someone else's money, are few and far  between - especially for the amateur. You will usually discover too late that you have misread the small print and end up out of pocket. For instance, the 10 per cent may be fixed but the 11 per cent is variable. Tomorrow it may plummet to 7 per cent.*

Above all, never borrow short to lend long. Never borrow money you must repay in a year's time and lend it out to someone else for two years. When the year comes around, you have no funds to use to repay your debt. Obvious? Yes, but men fall for it every day. It still causes many a downfall and bankruptcy.

HOW TO BORROW MONEY SUCCESSFULLY

'People even pop up on Christmas Eve. No warning. They want to borrow money to splurge over Christmas. No thought of repayment. They must think I'm daft. Of course, they never get a penny. Mostly women too.' The pompous young bank manager smirked down at his audience. My class of twenty-year-old secretarial students swallowed hard. They glared back at him with loathing. I veiled my delight. He brought a cold breath of the real world to the classroom. He also showed them what not to do.

Banking remains a male domain. Don't let the flock of girls behind the counter fool you. Bankers remain highly suspicious of lending a woman money - unless they know that her husband has means. When they do lend, she may well pay extra.

To get a banker on your side, you must be thorough, businesslike and never frivolous. You have to sell both yourself and your scheme.

Take Shona, who lives by the sea. Now in her thirties,  she did a clerical job before she married Michael. For some years her time has been devoted to her children. Now she has found she has time to spare.  Shona wants another interest and some extra income of her own.

One day recently, inspiration suddenly struck - a creaking sign outside a nearby house. 'BED AND BREAKFAST. H & C ALL ROOMS'.  Why not build an extension to their large house and offer bed and breakfast too? Shona puzzled, planned, discussed her idea with Michael. He hesitated, pointing out how often his job as a sales representative takes him away from home. This meant that the idea will be Shona's baby from start to finish.

Long before Shona approaches the bank manager, her idea has swelled and taken definite shape. She knows that his first question will be, as Michael's was, 'How much money do you need?' So she has obtained a couple of free quotations from builders. Over and above this she will have to buy new beds and bedding, furnishings, crockery, etc. Then expenses will arise like advertising in the newspaper,  a sign by the gate, repairs when guests cause damage, replacements as bedding wears out more quickly.

Here, chats with friends  and neighbours already in the trade prove invaluable. They raise important points - like keeping your family separate from your guests, and the discipline this imposes on all - and fill in gaps that Shona would never have thought of.

When the day comes, Shona can go to her appointment with the bank manager clutching a folder of precise figures backed up by evidence. Everything  will be neatly typed, with a copy for him to keep. At the sight of this, Shona will immediately overcome the banker's first prejudice against women - that they are too vague. Also, she will overcome his second - that they are frivolous - by arriving as formally dressed as he is and looking every inch a professional, the sort of person he would be happy to employ. With meticulous attention to detail, she will even make up her eyebrows knowing that delicate female arches radiate uncertainty.

Shona's preparations go far beyond estimates of costs. She knows that the bank manager will be certain to ask how she proposes to pay back the loan. The general answer is, out of her earnings, of course; but she has to be more specific than that.

First, she needs to know roughly how much interest he will charge her if he agrees to lend. Her starting point is to find out the going interest rate. This always depends on the base lending rate.

Shona can find this out by phoning up or visiting the bank or their website. Or she can read it any day in the heavier newspapers. Or click on http://www.npbs.co.uk/mortgages/opt_bankbaserate.htm

She realizes this figure is only a guide and must expect to pay several per cent more than base rate (another name for base lending rate).

How much more she will have to pay depends on the nature of the loan and how she impresses the manager. She has to overcome the fact that she has never personally borrowed before. Lenders look with a kinder eye at people with a successful record behind them.

If Michael were in her shoes, he could point out that he has been repaying the mortgage satisfactorily for years. So Shona must not be too dismayed (outwardly) if she is asked why Michael is not seeking the loan instead of her - and whether this means that her husband is dead set against the whole venture.

Bankers like borrowers to provide some of  their own funds for a business venture as well. This shows they are prepared to risk losing their own money, not just the bank's. In Shona's case the manager will ask if she has any savings.  If she can only answer 'no', her morale will plummet.

In fact, Shona's reply, which boosts her self-confidence at least, will be that the house stands in joint names. So she owns half, and the value has risen £30,000 above what they paid for it five years ago. This is not strictly relevant - neither Shona nor Michael wants to sell the house - but it stops her feeling a penniless dependent and encourages her to continue her request.

For this type of loan, Shona absolutely must convince the manager that her venture is soundly based. How much profit can she expect to make?

She has all these estimates ready to hand him. She knows how much she can charge; how long the season lasts; what her likely occupancy rate will be. The local chamber of commerce and the tourist information office were able to help her with these facts and figures.

What about the competition? If last year's summer had alternated drizzle and gales, but all the streets sported 'No Vacancies' signs, Shona would surely be backing a certain winner. If no signs had appeared, even at the crest of the summer heat wave, she should think again. In fact, judging by the competition, her prospects are fair.

When Shona has worked out the most she can hope to take in, she also needs to estimate her expenses. How much will it cost her to provide breakfast - not just the bacon and eggs, but the electricity for the cooker and the materials for cleaning it? Will she need to buy a tumble drier to cope with the laundry? Will she have to take on someone to help out, and if so how much will she have to pay?

You have realized, of course, that Shona is producing a profit and loss account, just like Sally did for her Salon in Chapter 5. The difference is that Shona's uses guesswork while Sally's recorded the facts. Both exercises are just variations on how you balance the household budget.

Taking expenses away from receipts shows Shona the maximum profit she can hope to earn. If this sum is not enough to meet the loan repayments, or is only just above it, she can forget the whole project. She would be working for nothing.

The manager will take his copies of all these details and may ask for time to study them more closely.  This is reasonable. Shona is not so foolish as to expect a snap decision when so much is at stake. The manager has his career to think of. He cannot afford too many lame ducks.

In the meantime, Shona will have other queries to raise about the loan. She will not trust to her memory in the stress of the moment. She makes a note of all those queries in advance and will scribble down his answers. Over what period might he be willing to lend? Would he consider an overdraft instead? Can she 'top up' by borrowing a further sum later is she needs to?

Shona must expect objections. She has tried to anticipate ones like 'You have two small children, Mrs Morris. How are you going to cope with them? Your husband works for a nationwide company. What happens if he gets transferred?' She may want to snap back annoyed, 'This has nothing to do with my husband.' But she wants that loan so she will answer with a calm smile, even if it is a tight one.

The manager's questions may be perfectly reasonable or they may be downright rude. ('How are you going to get your husband's dinner ready on time if you are running around doing bed and breakfast?') The point is, Shona has an answer ready. If the question is offensive, she will force herself to bite her tongue, smile to show she is in control, then assure him she has discussed everything fully with her husband. She can count on his full support in the venture.

Shona may be sitting there, tense as a ramrod, only to find the manager suddenly relax. He has been testing her by needling, but she has passed the test. Women, being 'queer cattle' as far as the world of finance is concerned, have to undergo these little niggles all the time. Once you realize what they are, they lose much of their force. It helps Shona too to think of the dozens of people who have wasted the manager's time and strained his temper with badly thought-through requests in the past.

Shona must school herself not to worry if the manager floors her with something she has never even thought of. She will calmly make a note of his query and promise to find out. After all, he may have just saved her a lot of money and future anxiety by pinpointing a weakness in her plans.

Shona must keep reminding herself that basically the man behind the desk wants to lend money. This is how banks make profits. Also, by starting so well prepared, she will have greatly improved her own chances.

She knows, even if he says yes straight away, she will not just ask one bank. A rival may offer her a better deal. On the other hand, if he finally refuses,  even though the meeting itself went well, this should encourage her to tackle other managers for her loan.

So, at the end of the day, does Shona get her loan, build the extension and start the next season? It all depends on the figures, and on the other people with schemes of their own who are competing with her for the bank's limited money.  But generally, if Shona has successfully done that much spadework beforehand, there is no reason why not.

Besides, although you must be serious, there is no need to be solemn. I know one enterprising group of women who offered to immortalize their helpful bank manager in return for a loan - by naming their new restaurant after him. It flourished.

HIRE PURCHASE AND LEASE PURCHASE

Compared to Shona's ordeal at the bank, getting hire purchase (HP) or lease purchase is far more impersonal. You simply fill in a form to prove you have the means to repay. (These days you can do it over the phone or the internet.)  At the same time, hire purchase costs you more. No one looks coolly at your project or gives you any advice.

Hire purchase   and lease purchase cover  specific assets (Shona's new tumble drier or bedroom suite) rather than money to spend generally in the business. When you buy something outright (even with a bank loan), you own it at once and can resell it if you want to. Normally, you pay the full cost at the start.

With hire purchase, you only pay a deposit before the goods arrive. They don't belong to you until you have paid the very last instalment. Until you have repaid a third, the finance company can seize the goods back if you fall behind with the payments.  You are not totally safe from losing your goods until you have paid half. You cannot sell them until you own them outright.

Leas purchase covers umpteen variations of buying by instalments. Some involve a big payment at the start or at the end. Other contracts make you sell the item - often a car - at the end of the period for a set price.  Sometimes they give you the option to buy it back again immediately.

The advantage with hire and lease purchase is that you need not find so much money at the outset. You can buy what you cannot afford and pay as you go. The disadvantages are the high interest rates you pay and the fact that buying this way is far too easy.

If you sign an agreement and then get cold feet, you will find details of your legal rights to cancel on the form itself. Normally, you have more protection - that is, a longer period to change your mind - if you agreed and signed at home than in a shop or show-room.

Many people tie themselves up with too many commitments. Some even borrow from the bank and then use the money to pay deposits on umpteen hire-purchase deals. They forget they are paying interest on the bank's money they use to pay their HP interest with. Many slide into a muddle and gradually realize that they have used up all their purchasing power for years to come. Treat hire purchase like  champagne - very nice, in moderation.

BORROWING TO BUY A HOUSE OR FLAT

Gavin and Debbie are a typical young married couple, fed up with living in grotty rented accommodation with other people's cast-off furniture. When they decide to buy a house, they immediately think, like most people in Britain, of their local building society. These are the most popular, although not the only, source of mortgage money. Besides, building societies show themselves more sympathetic to personal hardship than other lenders (as they did during the 1984-5 miners' strike, for example) and willing to wait for their money or allow borrowers to continue as tenants. In the early 90s, the scheme they agreed with the government helped hundreds to keep their homes.

To avoid painful repossessions, building societies place restrictions on lending in the first place. Their guidelines have stood the test of time. Historically, they refused to lend more than 2 and a half years' worth of joint gross earnings. (That is, what you earn on paper, not what appears in your wage packet after tax, etc.) Nowadays, even in areas where house prices are astronomical, 3 and a half times is the normal limit.

They may refuse to include Gavin's overtime income, as he cannot guarantee that it will continue. Gavin earns £10,000 a year** and Debbie £8,000 a year, so the most they can hope to borrow is £45,000  (£10,000 plus £8,000 multiplied by 2 and a half).

At the same time, the society considers the repayments to which Gavin and Debbie will commit themselves. These must not eat up more than one-quarter of their joint gross salary, here £4,500 (£10,000 plus £8,000 divided by 4).  Practice has shown that people cannot manage to keep up repayments at a higher level than this without great strain on their finances, temper and possibly marriage.

At first, Gavin and Debbie think this is unreasonable - until they remember that they will also have to find tax and National Insurance out of their joint £18,000, together with all their other living expenses, including those of the new house.

Most societies, unless they are suddenly swamped with lots of spare money to lend, insist that you save regularly with them first before you can borrow. Our couple foresaw this and opened an account six months ago. They have been paying in a small amount regularly by standing order towards a house deposit.

Building societies usually offer a straightforward repayment mortgage. This is the most popular sort and it usually works out cheapest in the long run. Suppose Gavin and Debbie succeed in borrowing the £45,000 maximum on a 25-year mortgage. By the end of that time, they will have repaid all the £45,000 plus all the interest due. They will owe nothing, and the house will be theirs, free of all debts.

Although repayment mortgages usually work out cheapest, you need a high income to start with. Neither Gavin nor Debbie could have borrowed enough on their own. Alternatively, you need capital of your own to supplement the amount your income enables you to borrow. The two together may build up to enough to buy you a property. Both fall hard on a young couple, so there are alternatives.

Some builders offer schemes where you buy a share in your home rather than buying it outright. Often they give you the option (choice) to buy the rest after a few years when you should have found your feet financially. There is now a government-sponsored shared ownership scheme. www.housingcorp.gov.uk/yourhome/shared.htm

These schemes mean that you need a smaller deposit or a smaller mortgage. The drawback can come when you sell. If you still only own part, you have to share the profit you make with the builder, but the builder does not share the selling costs with you. You pay the lot. Remember that, in practice, most mortgages only last seven years. People sell their home and pay off their mortgages early for many reasons: a job move, divorce, death, increase in family size, loss of employment.

These builders' schemes help low earners to get started. They also help builders to sell houses. Gavin might prefer this if he is afraid of the burden of a large loan, especially if Debbie is keen to start a family, leaving him to shoulder it alone as sole bread-winner. If you can afford it, stick to outright purchase; it is cheaper and more profitable in the long run.

Building societies are not the only organizations to offer loans to buy homes. Others, like insurance companies and banks, may offer interest-only mortgages, where you repay only the interest due as you go along. You may repay the capital by selling the property either at the end of the period or at any time when you want to move.

If the value of the house or flat should tumble, so you can only sell it for far less than you paid for it, less than the amount of the mortgage in fact, (you have negative equity is the expression) you will have to scratch around for more money. That is highly unlikely over twenty-five years but quite possible over two or three, especially including selling costs. Property prices rocket and plummet, but the underlying trend on our crowded island is up and up. Interest-only mortgages help you budget in the early years while you are still unsure of your future.

For this reason, interest-only mortgages are often offered by insurance companies and linked with a life assurance policy or even a pension scheme. The policy or pension scheme is designed to mature at the same time as the mortgage ceases. You use the lump sum from it to pay off the capital you owe on the mortgage. This way, you keep your home and own it outright. There is no guarantee that the lump sum will have grown enough, although historically, it usually does and with money to spare. Current low interest rates threaten this for the future though.

These schemes (called endowment-linked) turn out more expensive. They can be useful for an unconventional property. Perhaps Debbie has set her heart on a houseboat which the building society may not be keen to lend on. Or the house she wants may be in an area - run down inner city - where building societies are unwilling ever to lend; or it may even  have been built using ultra-modern construction techniques with steel, wood or plastic that the societies are suspicious of. In general, Gavin and Debbie should still stick to a repayment mortgage if they can get one.

People, especially older and more affluent people, can buy their home on a straightforward bank loan. This may cover five years or ten, or the bank may offer a full-blown 25-year mortgage.  Banks often prove more adventurous in their lending than building societies. That said, most building societies have changed their status to limited companies so that they are, in fact, banks. (Abbey National and Halifax are just two examples.) That means they aim to make money for the shareholders, not benefit the members. (Nationwide is still a mutual concern.) Ask before you decide to borrow.

Beginners like Gavin and Debbie usually find bank finance more expensive than a building society mortgage. The banks burn their fingers trying to rival building societies (and vice versa) and turn more reluctant to lend than before. Then their policy changes and they offer home-loans again. In business simply to make a profit, banks are less sympathetic than building societies when things go wrong, less willing to wait for their money.

The traditional repayment mortgage was a variable-rate mortgage. That is, the rate of interest you paid could and did change. It could increase or decrease. Nowadays, you can also arrange a fixed-rate mortgage. If later on, the normal interest rate for mortgages increases, people with a fixed-rate mortgage are ahead. Obviously, if the rate decreases, they are paying more than most people. Over the life of a mortgage, you could expect many ups and downs. Only when it is finally repaid, can one say whether you benefitted or not. But lenders must protect themselves, so they will pitch the fixed-rate higher to do just that.

In the 1980s, foreign currency mortgages became fashionable worldwide. Suppose the interest rate in Britain stands at 15 per cent but the rate in Switzerland is only 5 per cent. Instead of borrowing in pounds, you borrow the equivalent amount in Swiss Francs and repay in Swiss Francs. This way you pay 5 per cent interest instead of 15 per cent. This sounds neat but beware!

The exchange rate between the British pound sterling and any other country's currency changes every day. The rate can turn against you. (I give an example in the glossary, Chapter 21.) So, after years of repayments, you can still face debts of more than you borrowed in the first place. Foreign currency mortgages are a wild gamble.

Perhaps the amount the building society offers Gavin and Debbie is not as much as they need, even when they add on the amount of deposit they have saved. So they hunt around for someone else -  a bank or solicitor perhaps - to offer them a top-up mortgage (second mortgage) as well.

This will prove more expensive than the first, because the lender faces a greater risk. Debbie and Gavin have already reached their limit according to building society rules. Besides, the building society will keep the property deeds as security and take first bite at the proceeds if the house has to be sold up. The second lender comes next, if there is enough, finally Debbie and Gavin can keep any cash left.

There may also be strings attached to the second loan. Perhaps they have to use a certain solicitor to do the conveyancing. This is the legal work to buy the house.

A few years later on, Gavin and Debbie may be well established in their new home with mortgage repayments under control. Then Debbie may get a windfall or Gavin promotion. So they can consider repaying all or part of their mortgage early. To their dismay, they discover they have to pay extra to do this.

The 'reason' is that the society or bank cannot charge you so much interest because you are borrowing less or for a shorter time. The penalty you pay consoles them for this loss of interest. Many mortgages contain a clause along these lines. People often find it cheaper to continue to pay the mortgage and put their spare money on deposit, perhaps even with the same building society, crazy though it appears.

HOW TO BUY A HOUSE OR FLAT

Nor so long ago, building societies would only lend to married couples. If they included any of the wife's earnings in deciding how much to lend, this was emphatically a favour.

Even then, most houses and flats and hence mortgages stood in the husband's name only. A solicitor friend of mine told me that he counselled every new husband client separately. Be absolutely sure your marriage has worked out, he would advise, before you even think of including your wife's name in anything.

All married women should try at the outset   to get property and mortgages in joint names or to get them changed now. There is no need for a wife to be earning for this to apply. This makes it easier for a wife to establish her rights in case of divorce, separation or widowhood and can reduce inheritance tax later on (see Chapter 15).

Nowadays, unmarried couples can borrow. So can single women, either on their own or a couple together. Single men have never suffered any difficulties.

The joint purchase of a home on a mortgage by an unmarried couple can still cause problems. These arise either when the couple split up or when one of them dies. Normally, it is not the mortgage that causes the tangle but who owns the home.

Building societies insist that each earner takes out mortgage protection insurance. That said, they sometimes forget or disregard married women even now. The policy pays the survivor the amount still owing (outstanding) on the mortgage. He or she can pay it off and keep the house. With a married couple this is straightforward. With an unmarried couple, who inherits the deceased's share of the property?

The division of property between married couples stands clearly defined in law. This is still a cast-iron reason to coax and cajole any reluctant bridegroom to the altar!

With unmarried couples, life is a free-for-all. Especially if there is no will, it is unwise for a live-in girlfriend of many year's standing to assume that she will inherit. The so-called rights of the 'common-law wife' are another fallacy that many women find out about the hard way.

Where two friends share a home, unless one wills his or her share to the other, it goes to the relatives of the deceased. They can insist on immediate sale, which can leave the surviving friend homeless. She or he will receive their share of the proceeds, less their share of the mortgage, but this may not be enough to buy another place.

Similarly, when an unmarried couple split up, if one wants to sell but the other does not, the one who does can insist on the sale, leaving the other without a home.

These are all things to bear in mind, given your particular circumstances. A solicitor can tell you what legal safeguards exist, if any, or can be arranged to protect you. Obviously, you will have to pay for any documents the solicitor draws up, and you may need the written agreement of your co-purchaser. Bear in mind too, that the law changes. Gavin and Debbie have agreed straight off that their home will be in joint names, and so will the mortgage.

Next they jiggled a few figures before settling down to the pleasant task of house-hunting. They know the level of their income and the building society's rules of thumb. From this it is easy for them to work out how much they can hope to borrow. Then,  bearing in mind any other capital they can scrape together, and also the costs of furnishing, they can decide how much they can afford. Their other capital is the money they have saved with the society, a few thousands that Debbie's mother will chip in and the proceeds from a scrambling bike that Gavin is willing to part with.

Now they must be firm with themselves. They must only look at houses in that price range. To look beyond is to court disappointment.

Many people fall in love with a house and then call on the building society, only to discover they cannot afford it. Not only are they bitterly disappointed but it puts them off the properties they can afford. Nor surprisingly, cheaper houses appear poky or bare by comparison or situated in a dismal area.

Gavin and Debbie collect sheaves of estate agents' details. They find that some houses are described as freehold, others as leasehold.

FREEHOLD AND LEASEHOLD

When you buy a freehold house, you and your heirs own it outright for ever. When you 'buy' a leasehold property, you rent it for a set period. This may appear a long time, and many leases last ninety-nine years. You may start off with a new lease or step into the shoes of someone else (the present lessee) with a lease of perhaps just sixty years left to run.

To 'buy' a leasehold property, you pay a sum called a premium. This is what you need the mortgage for. Every year after this you pay an amount of rent. It may be tiny - just a few pounds - or significant, perhaps thousands.

The lease will also lay down the conditions of your occupation: what you must do, like paint the property regularly inside and out, what you can  and cannot do to the house or flat and even what you can use it for. It may forbid you to run a business from it.

Later on, if you want to, you can assign your lease and move out. That is, you sell the right to rent to someone else for however much remains of the original number of years.

Given a choice, Debbie and Gavin will be wise to buy freehold. Leasehold property carries only disadvantages. As the end of the lease draws near, the value of it falls, so you will get much less if you try to sell it. Don't be deceived even if the house or flat or similar ones are rocketing in value. You are not selling the property itself, only the right to rent it for a time.  The right to rent for five years is worth much less than the right to rent for ten.

On the other hand, you may still make a profit on a leasehold property. Suppose you bought a thirty-year lease in 1975 for £10,000. Ten years later even a twenty-year lease might have been worth far more than this because of the rise in all property values.

At the end of the lease, you must either leave or negotiate a new lease, usually at a much higher rent. You leave behind any improvements you have made, normally without compensation.

Maybe instead your landlord (the lessor) will offer to sell you the freehold. In other words, you cease to own a lease and buy the property itself freehold.

If your landlord makes this offer not at the end but in the middle of a long lease, expect to pay at least seven year's worth of  lease rent for the freehold.

If you are considering buying a flat, you will have to buy leasehold. Building societies will only lend on leasehold flats. Builders erecting a block of flats will set up a management company and transfer the freehold to it. Then, as they sell the leasehold of each flat, they also sell a share in the management company to the purchaser. This way all the tenants jointly own the freehold. They run the company together, paying in enough to ensure the proper upkeep of the whole building.

Without this, flat-owners   can run into horrible problems when the roof leaks and threatens the whole building and the top flat-owner refuses to repair it. Similarly, the cellar may flood and cause damp. With a management company, all occupants jointly own the freehold and so have an interest in  maintaining their investments and their homes.

I have only skimmed the surface of this subject. A solicitor, Consumers' Association publications and any up-to-date specialist book can tell you far more. You now appreciate that leasehold property is messy.

On the other hand, selling leasehold, especially converted flats in city centres, offers owners a lovely way to milk more money out of their property over the years. They rake in premiums and rent from a succession of leases. At any time they can sell their freehold interest, the outright ownership. The lessee has no say in this - the landlord can change overnight. (You should bear all this in mind for the next chapter when we look at investments.) If you are the hapless buyers and you want the flat, you will have to knuckle down to the landlord's terms.

HOW TO SELL A HOUSE OR FLAT

People agonize over which house or flat to buy and enjoy themselves doing it. Often they pursue another myth: the Perfect House. It does not exist and never can. But for people seeking a standard, easily resellable three-bed semi, the choice is vast. Once that decision is settled, the actual buying is easy. It is selling a property that is difficult, or jiggling the two together.

With our creaking, slow English system, people can let you down even while your furniture van is being loaded. Or you can get shackled up in a 'chain' in which your sale depends on a hundred others going through. Moral: NEVER BUY BEFORE YOU HAVE SOLD.

If necessary, and unless you are hampered by a young family and an old English sheepdog, consider selling with nowhere else to go. Move into bed-and-breakfast accommodation or stay with relatives, with your furniture in store, until you find the right house.

You will be amazed how many problems fall away once sellers discover you have cash in hand from the sale of your old place. You may even arrange a discount for a quick or cash sale. With luck, the interest you earn meantime more than compensates you for the inconvenience and expense of dislocation. And you are not saddled with any old house that you snatched at because you felt desperate for a roof over your head.

HOW TO LEND

'Neither a borrower nor a lender be' counselled Shakespeare. And why? 'For loan oft loses both itself and friend.' He was quite right. Yet most loans take place within the family and among friends. Could you steel yourself to sue your family to get your money back? Even if you could bear the unpleasantness, the permanent estrangement, it is a waste of family money to give it to lawyers. Besides, the chances are you put nothing in writing, so you have no grounds to sue.

If you want to help family or friends, give your money outright. You may call it a 'loan' to make them think they are independent; but mentally be prepared to forget capital and interest in a few years' time. So don't lend money if you are really likely to need it for yourself.

Besides, whatever they say in public, people never forget a penny they lent which was not repaid. Unspoken grudges like this can sour relationships for ever, perhaps over a fiver.

As the saying goes : lend your money and lose your friend.

Keep your real lending on an arm's-length, impersonal and properly documented business footing. I will offer you umpteen exciting alternatives in the next chapter, because you are now ready for the fun side of money - making it grow; in other words, investment.

* It is fatally easy to misread advertisements. The APR must be quoted in advertisements offering credit. In adverts seeking money for investment, they must quote an AER (Annual Equivalent Rate)!

** the figures are low but that keeps the maths simple. You just substitute your own.

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