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Dear Delia

Alan is a taxi driver in Birmingham earning 30,000 a year. He has a mortgage of 91,500 on his flat now valued at 130,000. He has a secured loan of 14,500 plus 7,000 credit card debts and one County Court judgement for 450. He lost his driving licence for six months and missed payments on his loan and credit cards but always paid the mortgage. He is now back taxi driving and wants to remortgage to 90% to clear his debts.

Delia says: It’s a good idea for him to remortgage but he has to be careful about hidden costs he may incur. Here to help are Rob Clifford of mortgageforce and Liza Gascoigne from SPML.

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

Intermediary Response
Rob Clifford is chief executive of mortgageforce

Alan almost certainly needs to remortgage to an alternative lender and consolidate his debts. His credit history and his CCJ in particular will dictate which lenders can be considered and the interest rate applicable.

He must to establish whether he has any early repayment charges applying to his existing mortgage deal and also check the early repayment provisions on his secured loan. The answers might make the difference between the remortgage being feasible or not. An adviser must establish whether Alan would benefit from debt consolidation.

Based on Alan borrowing £113,000 with an assumed valuation of his property at £130,000, he needs to borrow 3.77 x his income. While this is not impossible, not all lenders will consider this extent of borrowing despite the potential monthly reduction in aggregated outgoings.

Alan must be aware that by consolidating, all his borrowing will be extended to the mortgage term so it is likely he will repay more. He also needs to be aware that by remortgaging he is likely to incur a variety of fees, some of which may have to be paid upfront.

These could include a valuation fee, solicitors’ fees, arrangement fees and completion fees. Of course, it will be up to an adviser to determine an appropriate lender and product for Alan’s circumstances based on the findings of the needs analysis and the financial circumstances of the borrower.

One advantage of Alan remortgaging for consolidation purposes is that he would have one manageable monthly payment payable to one company and such discipline is helpful to most applicants in Alan’s situation.

Based on the information I have, it seems Alan could consider Freedom’s product with a discount for three months (5.33%) offering a maximum LTV of 90% and followed by Bank base rate plus 1.58% for three months. Thereafter, the pay rate reduces by 0.10% on receipt of every six consecutive payments until the rate reaches base plus 0.98%. This sensibly returns the borrower to near-prime rates in a structured way.

Alternatively, he might consider First National’s Ultralight product, also available up to 90% LTV. A one-year discounted rate of 5.34% is available and other rate options include a two-year fixed deal at 6.44% and a 6.64% rate fixed for three years.

Both lenders are likely to lend to Alan, subject to his current employment status, how often the payments were missed and when the CCJ was registered.

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

Rising property prices have given people such as Alan a safety net in terms of capital tied up in their property that can be released, but this is not guaranteed as a ready source of cash.

Property price records available from the Land Registry show that the price of flats in Birmingham fell between 2003 and 2004 by around 2%, then rose to the current 2005 average value of around £128,000 by only 0.9% – a modest rise by recent standards.

Taking a five-year comparison, the average price of flats in Birmingham was £69,000 in 2000, meaning that an overall price rise of 85% has occurred. Alan must have bought his current property before the most recent period of price stagnation, which has luckily provided him with a way out of his financial situation.

The second general point is that self-employed individuals are financially vulnerable if their means of earning their living suddenly disappears.

Alan was unfortunate to lose his driving licence because it meant he was without his main means of earning a living for six months. With many more self-employed or freelance workers now in the workforce in this country, this is a scenario we may well see more of in the future.

As Alan has managed to get by without any mortgage arrears and has only one CCJ that is under £500, SPML’s Near Prime range could provide a suitable option, with competitive rates including fixed and discounted options.

Above 75% LTV our income multiples are 3.75 which means Alan can borrow £112,500. This falls short of the 90% LTV he is seeking but is sufficient to redeem his existing mortgage and secured loans, and will leave him only £500 short of clearing all his debts. At this 86.5% LTV, SPML’s Near Prime product carries a loading over LIBOR of 2.50%, plus there would be an additional loading of 0.5% for self-cert.

There is a 2.25% discount option across all SPML products (to December 1, 2006) and two fixed rate options. At 86.5% LTV, the three-year fixed rate (to December 1, 2008) is 6.29% plus 0.5% for self-cert, and the two-year fixed rate (to December 1, 2007) is 6.39% plus 0.5%.

There is no early repayment charge overhang on either of our fixed rates.

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