Dear Delia

Jo is a first-time buyer and is looking to purchase an ex-council flat that is on the top floor of a six-storey block. She has only been self-employed for the past nine months so does not have a full set of accounts. Jo\'s income is 22,000 and the flat is worth 90,000. She has raised a 10% deposit. What are her options?

Delia says: Jo’s situation sees her straddle a number of potential mortgage categories. Thomas Reeh of Black and White and Helen Kleier of Rooftop Mortgages look at the options. Have you got a problem for Delia?
Email mortgage.strategy@centaur.co.uk

Intermediary response
Thomas Reeh is chief executive of Black and White
This is a tricky case that touches on a number of difficult lending criteria in terms of Jo being a first-time buyer with only nine months of accounts and wishing to purchase an ex-council flat on the sixth floor. But it poses a good challenge.

Having input Jo’s details into our mortgage sourcing software Trigold it is clear that prime lending alternatives are few and far between. In fact no options at all presented themselves. Many prime lenders will go up to four storeys but being an ex-council flat doesn’t help the cause as it is outside prime lending criteria. Most prime lenders also require a minimum of 12 months’ accounts and Jo has only nine.

A broker could potentially twist the arm of a prime lender and get them to agree to this deal if the other lending criteria were strong but it would be a long shot.

This leaves sub-prime lenders as the alternative, albeit more expensive option. The maximum LTV we established via sub-prime lenders was High Street Home Loans and Preferred’s 85% subject to satisfactory valuation and decision in principle. As 12 months’ accounts are not available these lenders will accept self-certification of income. Self-cert can be a big help to first-time buyers. We checked directly with the underwriters at Rooftop Mortgages and it would potentially advance the 90% required LTV subject to valuation and the valuer’s comments being favourable in relation to location and condition of the flat. The property must also have a lift.

Rooftop can offer a two-year fixed rate of 5.65% with no extended tie in at which point Jo could refinance to a prime deal. The lender also offers a three-year stepped discount starting at 4.85% in year one, 6.12% in year two and 6.62% in year three, the benefit being lower repayments in year one.

Rooftop Mortgages also has no higher lending charge which is helpful for a first-time buyer and fees can be added up to 90% LTV ratio. Jo’s difficulty highlights the problems in securing finance as a first-time buyer. She will also have to factor in about 5% for associated costs in relation to legals, Stamp Duty and lender and broker charges. That extra 5% can be the straw that breaks the camel’s back for first timers.

Her first step onto the property ladder may be her hardest and most expensive one, but staying out of the property market may well be more expensive in the longer run as the property market is showing signs of growth once more.

Lender Response
Helen Kleier is product development director at Rooftop Mortgages
Like many aspiring first-time buyers, Jo is looking at a property type that is potentially more affordable than the traditional converted maisonette.

Ex-local authority properties fall into this category and as such can make great starter homes. But one drawback is that lenders are generally more cautious about this type of property as values tend to be hit harder than other types during economic downturns. As a result, many lenders apply stricter criteria when considering lending on these types of properties.

So one of the main difficulties faced by Jo is likely to be finding a lender willing to lend on the home she wants to buy. Many lenders will lend on ex-council houses but it is harder to find one that accepts ex-council flats. Those that do usually set pretty strict criteria. Lenders may impose certain LTV restrictions, insist on minimum property values or stipulate that a certain proportion of the block in question is privately owned.

Many lenders will not lend on ex-council flats above the fourth floor and as Jo’s prospective property is on the sixth floor this may cause her additional difficulties in her quest for a mortgage.

A few specialist lenders, including Rooftop, do accept sixth-floor flats but we insist on lift access to properties over three storeys high.

Another potential stumbling block is that Jo has only been self-employed for nine months. Mainstream lenders typically require at least 12 months of self-employment while some specialist lenders are willing to accept less than this. Jo would have a choice of applying on a status or self-cert basis. For example, Rooftop requires at least six months’ trading for status applicants but has no minimum requirement for self-cert.

The income multiple Jo is seeking is around 3.7 x income which is above the market average for first-time buyers which, according to the Council of Mortgage Lenders, stands at 3.15. While we don’t know what Jo’s outgoings are, she could either go to a lender that offers this higher level of income multiple or seek out one that uses an affordability-based model. The latter approach is increasing in popularity and would work in Jo’s favour if she has few existing credit commitments.

The fact there are a selection of lenders willing to lend to people in Jo’s position is testament to the continuing evolution of the specialist market and the growing flexibility it offers. The level of competition in the market ensures the continuing development of better, more innovative products and this ultimately helps more people get on the property ladder and stay there.