Brian Jennings is an investment broker who was recently made redundant. He received a redundancy payment of £65,000 and has accepted a job with a rival firm but his contract means he can't start for six months. Brian is selling his London flat and buying a home in the suburbs and needs a mortgage to finance this. His previous salary was £75,000, his new one is £82,000 and his new property will cost £530,000. What are his options?
Sohan Jheeta, director of Leeds-based Personal Investment Planning Service says Brian should take steps to firm up his job situation before applying for a mortgage In the first instance, I would question the terms of redundancy from Mr Jennings' previous employer. Does it really state that it prevents him from joining the new company? Surely no-one has the right to deny anyone the chance of making a living. I suspect he could join the company, albeit not in the frontline, but in a more aptly termed post.
The company will benefit from his expertise since he could still dispense advice when required. I would recommend he speak to his future employer and request that he be offered a position with a less grand title. If his future prospective post is genuine then the company will entertain his request. Thus, both parties win. If they do not, then he should look elsewhere for a more secure post.
Six months is too long as the new job could cease to exist or the company may fold. When he does commence his new post there may be a probationary period and he could lose his job after that period, rendering him without an income. Furthermore, almost all lenders would want him to have worked for the new company for at least six months, unless he could produce a written guarantee that the post is permanent, before they would consider lending any money.
Mortgage lenders and advisers have the obligation to assess their client's affordability. That is, how is the mortgage going to be serviced? This is a contentious issue in that lender or the adviser could be sued for wrong advice. However, it does not mean that he cannot raise any mortgage capital. There will be a few lenders out there who will still consider his proposal under self-certification and this will be at a cost. The lender will charge over the odds for making their facilities available. Does he have any other savings which could service the mortgage if he were to fall on hard times in the future? When considering such a large mortgage his ancillary expenses will increase and the largest of these costs is going to be Stamp Duty. Since the house is above £500,000, then at 4% this cost alone will be £21,200. Other costs will include solicitor's fee, broker's fee, house survey, specialist reports (tree surgeon's report for example) removal cost and refurbishment of the house.
It is not known whether the London flat has any mortgage outstanding on it and if so, is it in negative equity? This could have a bearing on his future purchases. If some equity is being released then what is the size of this equity? It should also be determined whether or not there are any credit card or personal loans. In my experience, people almost always have one or two loans as standard.
Finally, there will be some tax implications in relation to the redundancy money. The first £30,000 is tax-free but the remaining £35,000 will be taxed at 40%. He has to declare this in his annual tax return, therefore his tax code will change next year. My advice is to wait and see in relation to his job situation. But it does not mean that he cannot get the ball rolling now by researching the cost implications.
Jeff Knight, mortgage marketing manager at Sun Bank suggests Brian could make an initial lump sum prepayment to cover the six months he is not working Job insecurity is a fact of life and Brian's situation is not uncommon. However, in his case the timing is unfortunate because he is in the process of buying a new house and may encounter problems in trying to find a mortgage as many lenders will be credit scoring his application and rejecting it because he is technically classified as unemployed.
Brian needs to approach a mortgage adviser who will be able to find him a lender who specialises in this type of application. For example, at Sun Bank our flexible approach to underwriting means we use common sense to make a practical decision on cases like this. Rather than depending on credit scoring, Sun Bank would take a more holistic approach and consider all aspects of Brian's financial situation.
Brian's recent credit history would be an important consideration, as would his potential ability to meet payments in the future. But assuming he has a clean credit rating, his current mortgage payments have been paid on time and he has a sufficient deposit of at least £243,000, Sun Bank would be happy to give him a mortgage. This is because he is a classic example of what we classify a complex prime application.
Although his situation is not one that would be considered favourably by some lenders, he does have a good income and will have an even better one in six months. He can therefore afford a mortgage of £287,000 (based on 3.5 x income). Assuming he has the deposit required to make up the shortfall this is a workable case and as he is selling a property he should have considerable equity to put towards the deposit.
He will need to demonstrate that he has resources to cover the mortgage repayments when he isn't working, as well as sufficient income to live on. We would need to see documentary evidence of his new employment confirming details, setting out his salary and start dates.
Hopefully Brian should be able to satisfy these requirements. He has received a large redundancy payment that he will be living off for the next six months and this should provide him with more than sufficient funds to cover mortgage payments until he begins his new job. But for our peace of mind, we suggest he makes an initial lump sum prepayment on the mortgage to cover the six months payments required when he is not working. Then once he begins his new job, he will start normal monthly payments.
In terms of interest rates, he can choose from a selection of fixed and discounted rates – with Sun Bank, for example, a two-year discounted rate of 4.25% that has a redemption charge during the discounted period only, or if he should prefer longer term stability he may wish to opt for a five-year fixed rate of 5.99%.