Dear Delia Colin and Mandy bought their council house nine months ago, having been tenants for three years.
They bought at a discount for 57,600, borrowing 60,000. The value is now 88,000 and they want to remortgage, borrowing 75,000 to pay off some loans. Their income was 16,000 at time of purchase but now Colin earns 18,000 and Mandy 6,000. A mortgage payment has been missed and Colin has a CCJ for 550.
Delia says: There are a number of options that the couple can consider. Tristan Pile of CMLS and Liza Gascoigne of SPML give their views.
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Tristan Pile is head of sales and marketing at Complete Mortgage and Loan Services
Looking to remortgage within the pre-emption period up to 85% to consolidate debts restricts these clients’ options. But as the pre-emption period has recently been extended from three to five years, it’s likely that demand for this sort of solution will increase over time and more lenders may offer this facility in future.
From CMLS’s packaged lender panel, the lenders that could accommodate this case include SPML, where this case would fit within its Minor Adverse scheme at a pay rate of 2.75% above LIBOR up to 85% LTV. Income multiples of 3.25 joint would allow a loan of 78,000, comfortably above the couple’s requirements.
Other lenders that would consider this case are GMAC-RFC, Kensington and Platform. GMAC-RFC would be happy to lend on its Right to Buy range up to 85% on a full status basis. Assuming Colin and Mandy’s payments are up-to-date at application they could benefit from a two-year fixed rate at 6.49% with no early redemption charge overhang on the Right to Buy Near Prime product.
Kensington would lend on its Right to Buy Very Light product. This would allow for the applicants’ CCJ and missed mortgage payment. The clients could benefit from a one-year fixed rate of 6.09%.
Platform will remortgage a property purchased under the Right to Buy scheme on its RTB Minor Adverse and Light schemes. The applicants must have owned the property for six months. Colin and Mandy would fit on the Light scheme which allows for up to 2,000-worth of CCJs and one missed mortgage payment. The clients could take a two-year fixed rate at 6.6% with no extended early redemption charge thatwould allow them to borrow the 85% that they require.
On a full status basis, GMAC-RFC, Kensington and Platform would lend up to 3 x joint income, which would mean a loan of 72,000. All lenders will take overtime and bonuses into account, which would enable the clients to borrow the 75,000 they want.
A secured loan option was also considered. A number of secured loan lenders will consider lending on a Right to Buy remortgage within the pre-emption period. Unfortunately, on this occasion it wouldn’t be viable due to the outstanding discount which would be deducted from a clients’ income before a lender would apply their debt to income ratio.
CMLS has branded lending through Complete Residential Funding (GMAC-RFC) and Complete Homeloans (Kensington). The benefit of this being that the process from the enquiry to completion is always under our control.
Liza Gascoigne is head of product development at Southern Pacific Mortgage Limited
Right to Buy sales are on the increase, reaching 69,600 in 2003 to 2004, up from 31,500 in 1995 to 1996. Demand for remortgaging Right to Buy is also likely to rise.
Remortgaging a Right to Buy property poses the same potential problem as the original deal – a local authority’s right to reclaim its original discount if the property is sold within five years, usually referred to as the pre-emption period. A lender will have to be confident it will have full title to the property should the ultimate sanction of repossession have to be invoked – and this applies to every loan, not only those using ex-council houses as security.
Loans made on properties still in the pre-emption period represent a higher risk because the local authority can claim back its discount if the property is repossessed and sold within this period, leaving the lender to bear any loss on the deal. SPML has solved this problem by using title which gives us the confidence to remortgage Right to Buy properties within the pre-emption period, so we would be able to consider this case.
It seems that the relatively low income of the couple initially restricted the amount they could borrow to a sum well below market value, so it might be feasible to go to a higher LTV to raise the extra cash they need, now their regular income has increased. Given the couple’s circumstances – including Mandy’s return to work – it is unlikely the family will be in receipt of tax credits, which SPML includes in full for income multiplier calculations. Our terms also allow for remortgage of Right to Buy properties after the first six months of ownership.
The couple’s adverse credit factors fit within our Minor Adverse range which allows one month’s arrears in the past 12 – none in the past three – and CCJs up to 1500. The desired loan amount of 75,000 is slightly above 85% LTV of the 88,000 market value so the couple may wish to borrow 200 less to bring the loan within 85% to have a rate loading on LIBOR, of 2.5% compared with a 3% loading for loans up to 90% LTV. Taking the couple’s income multiple at 3.25 x joint, this totals 78,000 which covers their required loan of 75,000. If they had wished to borrow at a higher LTV, taking their tax credits into account would allow for a larger loan size, within our 90% LTV top limit on our Minor Adverse scheme. On this scheme, fixed rates are available at 6.39% to December 1 2007 and 6.29% to December 1 2008, plus a discount option of 2.25% to December 1 2006.