Dear Delia

My clients bought their property with a sub-prime lender due to their credit history under the Right to Buy Scheme in December 2005. The property is valued at 100,000 and they owe 46,000 on their mortgage. They incurred a County Court judgement of 4,500 in February 2006, which they satisfied in June. They wish to raise 29,000 to consolidate debts and make home improvements. What are their options?

Delia says: It is important to find a sub-prime lender willing to remortgage within the Right to Buy pre-emption period. Michael Coates of Chestnut Finance and Georgina Maun of Mortgages PLC look at the options. Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Intermediary response
Michael Coates is managing director of Chestnut Finance

As the property was bought with a sub-prime lender last December, I expect that a redemption penalty is payable as most if not all sub-prime lenders do not offer Right to Buy mortgages without redemption penalties. A clear calculation must be made and the client should be aware of the additional costs of remortgaging.

Remortgaging within the pre-emption period restricts the market in this case, especially as the clients have a satisfied County Court judgement of 4,500. They will need a sub-prime lender and this means higher interest rates and in some cases extended redemption penalties and repayment overhangs. But the clients will hopefully be making monthly savings by consolidating their debts.

Most lenders will not accept remortgages within the pre- emption period unless the money is being used for home improvements, and receipts and works can be proven.

My recommendation is a lender that will accept a remortgage within the pre-emption period and also the 4,500 CCJ. As these clients are consolidating debts I recommend a fixed rate product to secure monthly outgoings. This must not have an early repayment overhang, as when the fixed rate terminates the clients’ monthly payments could rise and undo the saving of previous years.

They will have to pay the redemption penalty to remortgage which could increase their borrowing and as they will probably extend their long-term interest I recommend a lender that will allow overpayments without penalty. This will reduce their amount of interest and could shorten their mortgage term.

I recommend Mortgages PLC’s near prime plus range. The lender will accept the CCJ as long as it has been fully paid, assuming that the clients have not slipped into arrears in the past 12 months. MPLC’s affordability approach will also be of benefit.

I also recommend that the clients take advantage of any potential monthly savings to either reduce the mort- gage term or, more appropriately, overpay their mortgage. The best way to do this would be to arrange for a standing order to be paid on the same day as the mortgage. After a period of time this will become a habit as MPLC calculates interest monthly.

The amount they owe and the interest they pay will not be recalculated immediately following any lump sum overpayment but on the first day of each month. MPLC allows overpayments of up 5,000 during a 12-month period without penalty.

Lender Response
Georgina Maun is product development manager at Mortgages PLC

This scenario is typical of the circumstances many home owners are facing. With consumer debt at an all-time high, more people are finding themselves facing financial difficulties and picking up CCJs along the way.

Many borrowers also realise that one solution to their problem is to consolidate expensive unsecured debts into a single, low-cost remortgage.

The good news is that these clients have been able to satisfy their CCJ fairly quickly. The bad news is that it was for the large sum of 4,500. With such a big CCJ they will have to consider another sub-prime lender for their next mortgage deal as most high street lenders will be unwilling to consider an application.

They will also have to find a sub-prime lender willing to remortgage within the Right to Buy pre-emption period. Most sub-prime lenders permit this after a certain time but this differs from lender to lender. At Mortgages PLC, our minimum time is six months for any of our standard products.

We do not know if these clients are in arrears and, if so, by how much or for how long. If they are, this will reduce the options available to them. What’s more, only a few sub-prime lenders allow borrowers to refinance from another sub-prime lender but MPLC does. Given their situation, it is likely these clients also need a lender that will be flexible and take an affordability-based approach to assessing how much they can borrow. Affordability calculations are becoming more widespread but not all lenders have yet adopted this approach.

With an outstanding mortgage of 46,000 and a desire to raise an additional 29,000 on a property valued at 100,000, these clients are looking for a 75% LTV product which is in their favour. Given that they have been in debt and suffered financial difficulties they might also find it helpful to fix their payments so they know where they stand in future.

MPLC’s two-year fixed rates with no overhanging early redemption charges start at 5.37%. We ignore all satisfied CCJs and these clients would therefore qualify for our near prime plus mortgage rather than a heavier adverse product with a higher rate.

Also, we use an affordability calculation and give borrowers the ability to make overpayments of up to 5,000 a year so they can reduce their level of debt when they are in a position to do so.