Dear Dippy Stephen and Julie are starting a family and want to remortgage as they near the end of a four-year fixed deal. Stephen's income varies – a basic £25,000 with bonuses taking this up to £32,000. Julie earns £16,000 but may take leave once the baby is born. The house is valued at £150,000 with an outstanding mortgage of £112,500. They have no savings. Any suggestions?
Dippy says: The difficulty here is deciphering how much income is at hand whilst trying to ensure the couple save adequately for their family. We have John Lee from Genesis Home Loans and Kristy Irving on hand to tackle the case.
John Lee, head of sales and marketing at Genesis Home Loans
With Stephen and Julie's current situation there are several issues to consider. Firstly, Stephen's income varies due to the level of commission earned so he would have to look at a lender who will take into account a proportion of commission combined with a high income multiple.
Secondly, Julie may decide to remain at home after the birth which would remove her income from the household and make the couple's monthly budget even tighter.
Looking at these two factors it would seem prudent to leave Julie's income out of the equation, leaving her free to decide at a later date whether she intends to return to work.
Another important consideration is the type of rate they should choose. And with no savings they may want to consider a deal that has little or no fees associated with it – such as free valuation and free legals.
Finally, the length of rate chosen should be given some thought, again dependent on Julie's future plans. For example, should she be planning to return to work within a couple of years, a shorter fixed period would give them a competitive rate whilst enabling the couple to remortgage again when and if Julie returns to employment.
Alternatively, if she intends to remain at home until their child reaches school age a longer term fixed product would offer them the security of knowing what their monthly payments will be, albeit at a slightly higher rate.
Alliance & Leicester will allow Stephen to include half of his commission income – figures will be taken from his last P60 – on top of his basic salary and then give him a 4 x single income multiple. This would give him a maximum borrowing of £114,000.
A&L can offer a fixed rate of 4.59% until June 30 2006 or a 4.85% fixed until the same date but with the added benefits of a refund of valuation fee and £250 cashback to help towards the legal cost of remortgaging.
Similarly, Bristol & West will include half of commission income on top of the basic salary – again with evidence over a 12-month period as shown on a P60, subject to credit score – and also offer a 4 x income multiple.
B&W has two good five-year fixed rate products should Julie decide to remain away from work, the first of these being 5.05% fixed until March 31 2009. A second option is available at 5.25% until the same date and offers free valuation and a free legal service. This may be an incentive for the couple as they save towards the addition to their family.
Kristy Irving, intermediary mortgage marketing manager at Abbey
The first thing to consider is the predicted change in income for this family.
Taking on another fixed rate mortgage would have certain advantages – they could predict their outgoings which would allow them to budget regardless of rate increases. The downside is they may then be committed to their fixed outgoings for a certain length of time with no option to take a break if finances become tight.
Although Stephen and Julie have no savings, this should not be a barrier to recommending an offset mortgage. The beauty of offsetting is that it benefits people with a wide variety of financial circumstances. Undoubtedly, the rewards will be greater the more the customer has available to put into the savings pot but the flexibility can be useful for all.
Although we don't know what other financial commitments this couple has, Julie's income provides a significant contribution and would be missed. The flexibility of an offset mortgage will allow them to make underpayments or take a payment holiday, alleviating any pressure she may feel to go back to work quickly after the baby is born.
Offsetting offers flexibility in monthly payments – the option to pay more into their mortgage at times when Stephen receives a bonus, the option to save or make overpayments if Julie does return to work and the option to borrow additional funds at the same rate as their mortgage.
Some lenders place a limit on the number of payment holidays or overpayments and charge a penalty on any features exercised after that. Abbey Flexible Plus mortgage offers unlimited under and overpayments, lump sum contributions and access to additional funds up to the agreed amount without penalty.
As a guide, based on Abbey's Flexible Plus mortgage (with a variable tracker rate of 4.75%), if Julie decides 18 months from now to take a break for an extra six months, that leave is unlikely to be covered by maternity pay. In preparation for this Stephen could make two lump sum payments using his bonus within the first 12 months, totalling £10,000. With the Flexible Plus mortgage these lump sum payments are credited to the savings pot which is then offset against the mortgage loan. While Julie isn't earning the couple can take a payment holiday. This is funded using the savings element of their offset mortgage. At the end of the six months Julie and Stephen continue their monthly payment leaving £6,151.72 in their savings.
This continues to be offset against their mortgage loan, saving them £12,655.62 in interest and reducing their term by two years and five months.