Dear Delia…

Dear Delia, Jason wants to buy a property valued at £300,000 and has a mortgage arranged for £120,000. But with exchange and completion just two weeks away the buyer for his existing property pulled out. Jason has a £70,000 mortgage on his existing property, which is worth £250,000, and was using the equity from the sale as a deposit for the new purchase. He earns £65,000 a year as a management consultant. He wants to buy the house so how should he proceed?

Delia says: All is not lost, as Julie Johnston of Mortgage Intelligence and Paul Woodland of Royal Bank of Scotland Private Banking point out. Email mortgage.strategy@centaur.co.uk

Intermediary response
Julie Johnston is head of mortgage products at Mortgage Intelligence
Jason has found himself in a difficult situation and one all too common in today’s housing market. But he is not without options as he has sizeable equity in his existing property.

Jason could approach his existing len-der for a further advance but the maximum LTV would be limited to 90%, possibly even 85%. This would give him a maximum of £155,000 as a deposit for the new purchase. He could also look at remortgaging his current property to a new lender and borrowing the maximum LTV available.

But these options would not provide the £180,000 deposit Jason originally budgeted for and remortgaging to a new lender could take longer than the two-week deadline. He would also need to remortgage his current property on a buy-to-let basis via a product with no early repayment charges, as he can’t have two residential mortgages.

Approaching a lender that does not require simultaneous sale and completion is an option. Intelligent Finance would lend Jason 95% of the new property’s purchase price – £285,000 – but he would still need to find a 5% deposit. He would then have 90 days to complete the sale of his existing home. IF will take Jason’s existing mortgage payments into account when assessing the affordability of the new mortgage.

Bridging finance is an option he should consider. There are two types of bridging loan – open and closed. Jason would need an open bridging product as he has no set exchange or completion date for his existing property.

The advantage of bridging finance is that it can be arr-anged quickly, normally within 10 working days. This would allow him to complete on the new purchase within the two-week deadline.

An RBS bridging loan would allow him to borrow 75% LTV while requiring him to repay his existing £70,000 mortgage. He would need to increase his mortgage facility of £120,000 to purchase the new property, but this option would give him a sizeable deposit of £155,000.

RBS would take a letter from Jason’s estate agents confirming the sale price instead of a full valuation report, allowing the lender to make a formal offer to him and his solicitors in seven to 10 days.

The term for open bridging finance can be anything from one month to a maximum of one year, with most loans repaid in the first few months. Interest would be calculated on a daily basis and charged monthly but no capital repayments have to be made. This means that Jason would not have two mortgage payments for a lengthy period of time.

Lender response
Paul Woodland is area manager at the Royal Bank of Scotland Private Banking
With a buyer pulling out at the last minute, Jason needs to act quickly. Luckily for him RBS is one of the few high street lenders that provides short-term bridging finance for situations like this.

For Jason an open bridging loan could provide what he needs. Our proposition would allow him to release up to 75% of the equity in his existing property towards the new purchase.

Having lost the buyer Jason has no guarantee when his property will sell, so by restricting the loan to 75% LTV he still has the option of reducing the asking price to facilitate a quicker sale.

Upon receiving a fully packaged application we would aim to provide Jason with a decision in principle within 48 hours and have a formal offer with his solicitors to allow him to exchange on his purchase in two weeks’ time.

Interest on our bridging loan product is calculated daily on the outstanding balance and should be serviced on a monthly basis.

No capital repayments are required and there are no charges for full or partial repayment. The loan is provided with a six-month review date, although most loans are repaid within this time.

A unique feature of our service is that we will take a letter from the customer’s estate agents in lieu of a valuation, asking them to confirm the sale price they would expect the property to sell for in six months’ time.

In Jason’s case this would provide £187,500. Our security for the loan comes by way of a first legal charge over his property. In order to achieve this we would need to repay his existing mortgage of £70,000, leaving £117,500 towards the purchase.

This means that he will need to go back to his broker and look to increase the mortgage available on the purchase to £182,500.

But Jason should ensure that the deal is sufficiently flexible so that when he sells he can reduce it to the level he originally requested but without penalty. As he earns £65,000 a year he could take out a much higher mortgage on the new property than he originally arranged.

Interest is typically charged between the Bank of England base rate plus 2.25% and plus 3%. Jason would pay an arrangement fee of up to 1.5% that could be added to the loan if required.