Many people have bought their houses through building societies, and it is a plan that can be recommended in every way if (a) a reliable society of long standing is chosen, and (b) the borrower can reasonably expect to be able to repay his loan in regular instalments. With most building societies, the capital may not be repaid when one pleases, as with banks, but the borrower must meet a definite payment at regular stated intervals.
Before agreeing to the terms suggested by a building society, it is well to find out exactly what you are paying for the loan. Take particular notice of the interest required, and ascertain whether it has to be paid annually on the outstanding balance or on the original sum.
To make this point clear we will suppose that a loan of £600 is taken up, repayable in six years at 6% interest. At the end of the first year, you should repay £100 of the loan and £36 in interest.
At the end of the second year you should repay £100 of the loan, and £30 in interest, since the loan is now reduced to £500.
At the end of the third year, you should repay £100 of the loan and £24 in interest, and so on, for each subsequent year. It may be arranged that you pay an equal sum at the close of each of the six years. But the amount disbursed should approximate to that estimated by the method set out. These figures are mentioned because it has been found, on looking through the forms of two of three societies, that though they advertise loans at 6%, they are really charging 12%, since they demand full interest on the original loan throughout the full period of repayment, whereas the loan rapidly grows less as repayments are made. It is well to state, however, that all societies do not follow this plan. Note that income tax is not paid on the sum expended in interest.
It is of interest that anyone who is not in immediate want of a house may profitably use the resources of a building society, if he is so inclined. By making certain regular payments, he can accumulate a fund in the society’s books which will become available for purchasing property whenever he wishes. The money will bear interest, and when a house is wanted it will form a very pleasant ‘nest-egg’ towards the purchase price.