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Dear Delia

IT contractor Alex earns £45000 a year. Eight months ago he split up with his partner and moved out.

The original home is worth £275000 with a mortgage of £140000. Half the equity represents Alex’s investment and he wants to buy out his partner for £35000. Half the equity represents Alex’s investment and he wants to buy out his partner for £35000 and move back in. Soon after the split he built up several months’ arrears and underpayments on the mortgage plus defaults on other commitments. He has no CCJs a regular work contract and needs a mortgage quickly.

Delia says: Alex has a number of options. Here to help are Liza Gascoigne from SPML and Frances Scanlan from Knight Funding.

Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Packager Response
Frances Scanlan is CEO of Knight Funding

We would have to establish whether Alex’s status is employed or self-employed as this could make a difference to the mortgage choices open to him.

As part of a general review of his borrowing situation, the possibility of debt consolidation should be considered. If the payments on consumer debt are onerous they may jeopardise Alex’s ability to re-establish a good mortgage payment record.

Care must be taken to explain the pros and cons of debt consolidation – for example the overall cost of rolling up short-term debt into a long- term mortgage, and the implications of securing previously unsecured debts on his home. Consideration will also have to be given to whether the existing debts are in single or joint names as Alex will not wish to consolidate joint commitments. On the other hand, if he only remortgages for 175,000 then his LTV will remain low enough to ensure he gets competitive mortgage terms.

By remortgaging the whole sum into a sub-prime mortgage Alex will probably be paying a substantially higher interest rate on the whole new loan than he is paying on his current high street mortgage. Assuming the first mortgage is in Alex’s sole name, one option is to consider a secured loan for the additional sum required and leave the original 140,000 loan with the high street lender.

If the decision is to remortgage the whole amount, a number of suitable products from Knight Funding’s lender panel could accommodate the relatively high amount of recent arrears. Alex is probably looking for some rate stability in the first few years so he will probably want to look at fixed rate options.

If his arrears are no more than three months in the past 12 (of which only two are in the past six), Kensington’s medium adverse product MA1 could be suitable. It has a three-year fixed rate option of (in his case) 6.59%.

Platform can offer a three-year tracker mortgage if the arrears are no more than four in the past 12 months (of which only one is in the past three). The rate would be LIBOR plus 1.75% – at current rates amounting to 6.37%. Another choice to consider is Victoria Mortgages’ medium range of products. Here again, arrears must be no more than four in the past 12 months, of which only one can be in the past three. This product has a three-year fixed rate option of 6.44% or a two-year fixed rate at 6.49%.

Lender Response
Liza Gascoigne is head of product development at Southern Pacific Mortgage Limited

When relationships break up the expense of paying for somewhere to live can double as one individual moves out of the home into rented accommodation.

Last year there were around 167,000 divorces and annulments in this country, the highest annual figure since 1996. In 1961, there were only 27,000 divorces in Great Britain but, once the Divorce Reform Act came into force in 1971, numbers soared to 125,000 in 1972 and reached an all time peak of 180,000 in 1993.

Although in 1961 the vast majority of couples were married, co-habitation is now the norm. This means official divorce statistics are likely to represent just the tip of the iceberg when it comes to relationships breaking up and the financial problems this causes.

In the example given here, there is a considerable amount of equity in the property which means, even after clearing the outstanding mortgage and paying the settlement sum (a total of 175,000), the required loan will still only be at 63.5% LTV. This represents a good risk for lenders.

But it’s likely Alex’s mortgage arrears are recent, and most sub-prime lenders prefer applicants’ credit histories to show the most recent period has the least amount of adverse credit. Nevertheless, he should not find it too difficult to get a mortgage.

Within SPML’s 8 range (assuming his mortgage arrears amount to more than one in the past three months) the fast-track scheme would be suitable for this borrower. On loans up to 65% LTV, there is no rate loading for self-cert – which would be needed because of the borrower’s earnings history.

At this LTV, income multiples are 4 x a single applicant’s income. In the case given here, this is 180,000, which is more than enough to cover the sum needed. Our medium adverse, heavy adverse and fast-track schemes have an either/or facility for arrears and CCJs whereby borrowers who only have arrears or CCJs pay a lower loading than those with arrears and CCJs.

As Alex has managed to avoid getting a CCJ issued against him he can benefit from this feature too.

On SPML’s fast-track scheme the mortgage rate for Alex would be 2.75% above LIBOR which currently stands at 4.59%, making a payable rate of 7.34%.

There are also fixed rate options. On the fast-track scheme at 65% LTV the two-year fixed rate option (to December 1 2007) is 6.29% and the three-year option (to December 1 2008) is 6.19%. There is no early repayment charge overhang on either fixed rate. A discount option of 2.25% is available until December 1 2006.

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