Dear Delia

Have you got a problem for Delia?

Dear Delia Emily and James bought their council house 10 months ago and want to borrow 12,000. James has a low basic salary and his main income is in overtime. They also receive tax credits. Due to a recent County Court judgement and a missed mortgage payment eight months ago they have been advised to apply for a self-cert deal but feel they can prove their income. They have been turned down by their lender. What are their options? Delia says: The CCJ is not a huge problem and the couple’s situation is helped by the gift of a 10% deposit. Here to advise are Mike Fitzgerald of Brentchase Financial Services and Roz Cawood of SPML. Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Intermediary response
Mike Fitzgerald is sales director of Brentchase Financial ServicesRaising money for home improvements just 10 months after exercising the Right to Buy can present problems. It would have been better if they had applied for extra money at the time of purchase.

In 10 months the clients have managed to acquire a County Court judgement and also missed a payment just two months into their mortgage.

They did the right thing by going to their current lender but unfortunately were turned down. This may be due to their credit history and James’ low salary. The overtime may be of a regular nature but could stop at any time.

I assume that as first-time buyers the couple selected a mortgage scheme such as a fixed or low discount rate for several years. This means there are redemption penalties on the mortgage and I’d like to know what these are before advising them further.

Changing lenders within a redemption period is not to be recommended unless there are clear and substantial benefits. Switching means they would have to pay costs such as repayment fees and redemption penalties.

As the clients’ credit history is damaged the only choice open to them would be a lender that would charge an interest rate possibly higher than they already pay. If they change lenders, increase their mortgage by 12,000 and also borrow the money for fees they will be in a far worse position than they are now.

After a detailed fact-find we would be able to determine their true financial position. Maybe they should wait until their credit has got better and they are out of the redemption penalty period. Their adviser could then approach a major lender who might be able to offer them a better deal.

If the clients really want to go ahead we would also explore the possibility of a second charge loan. Although this may be of help to them, the monthly repayment figure would be crucial and with James’ low salary and their recent problems the best advice would be to wait until both he and Emily are in a better position to borrow extra money.

If the 12,000 is required for essential redevelopment work they may be able to approach the council for a grant.

I note they have been advised that a self-cert mortgage may be available but affordability is crucial and as the main part of their income is made up of tax credit and overtime it would be best to wait until their situation improves.

Lender Response
Roz Cawood is head of strategic partnerships at Southern Pacific Mortgage Limited
Right to Buy sales totalled nearly 50,000 in 2004/05, down from 69,600 the previous year. But a total of 380,000 sales over the past seven years represents a substantial niche mortgage market. Many Right to Buy applicants take the broker route and options frequently need to be sought in the sub-prime sector, as is the case here as the applicants have a missed mortgage payment and a recent CCJ against their name.

Tenants buying their rented local authority properties under the Right to Buy scheme are entitled to a discounted purchase price depending on the length of time they have been tenants and subject to maximum values. These values range from 38,000 for most areas in the South-East to 16,000 in most areas of London, Wales and 10 designated areas in the South-East. If Right to Buy properties are sold within five years – known as the pre-emption period – the local authority can reclaim this discount on a sliding scale.

This can present a problem to potential lenders regarding either the original purchase or a subsequent remortgage. This is because, should the property be repossessed within the pre-emption period, the local authority’s clawback of the discount may leave a lender with a shortfall. Seeking a remortgage after only 10 months in the property means that there is a long pre-emption period still to run for Emily and James. This is not a problem for SPML as our use of title insurance gives us the confidence to remortgage Right to Buy properties within the pre-emption period.

According to the Department of Communities and Local Government, average annual house price inflation was 3.6% in the first quarter of 2006 and 5.6% in 2005 so it is unlikely that the property has experienced a substantial rise in value in 10 months. The equity of 12,000 must therefore result from the difference between the original open market value and discounted price.

Assuming that the couple’s income is sufficient to raise the extra 12,000 at our multiples of 4 x single or 3.5 x joint income up to 75% LTV they would fit our light adverse scheme that allows up to 3,000 in CCJs and up to two arrears in the past 12 months, with none in the past three months.

We accept overtime as income and this need not be guaranteed. We also accept working family and child tax credits. If the couple do not wish to self-certify, thereby saving themselves between 0.25% and 0.50% in self-cert loading, the relevant income documentation must be produced. LIBOR loadings on the light adverse scheme range from 1.75% at 65% LTV to 3.25% at 90% LTV, and fixed rate options from 5.84%. Discount options of 2.25% (one year) and 1% (two years) are also available.