Dear Delia

John is a first-time buyer looking to buy a £165,000 flat with his partner. He has been in his job for just four months - he earns £22,000 and last month satisfied a £500 CCJ. His partner earns £24,500 and has no debt. Her parents have offered to pay the 10% deposit on the property as a gift. What options are available to them?

Delia says: John’s recent CCJ is not an insurmountable problem in today’s competitive market, and the couple’s situation is helped by the generous gift of a 10% deposit. Offering advice this week are Tim Henson of All Types of Mortgage and George Patellis at Preferred Mortgages.

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

Intermediary response
Tim Henson is compliance director of All Types of Mortgages
I assume that John’s position is on a permanent basis, and that he and his partner wish to borrow £148,500 (90% of a property purchase price of £165,0000). Based on standard joint income calculations of 2.75x income, they would only be able to borrow £121,000. Because of this AToM would be looking for a lender willing to consider a slight income stretch (3.1 x joint) to enable them to purchase the property they want.

Not only will AToM have to find a lender who will look at the case based on affordability, but we will also need one who will take a view on the fact that the 10% deposit is gifted and that John’s registered CCJ was only satisfied a month ago. This may prove problematic as lenders like applicants to have a clean credit history at point of application.

AToM would recommend a deal from Abbey because it looks at an applicant’s circumstances on a case by case basis. Abbey would need to know what the CCJ was for, but providing this was acceptable it might be able to help John and his partner. For applicants looking at LTVs up to 90%, and who jointly earn between £35,000 and £60,000, Abbey is able to stretch income multiples to 3.6x joint earnings. Providing John’s partner is able to get a letter from her parents stating that the £16,500 they are giving them is a gift, this is all the information Abbey needs for its underwriting requirements.

AToM would recommend a two-year fixed rate with Abbey so that John and his partner are assured of what their monthly payments will be for the first few years. On a loan of 90% Abbey would charge a high lending fee at 7.25%, on the amount of the loan in excess of 89.9 to 92.5% which this loan falls into – a charge of £1,794.38 is based on the loan amount from 75% LTV to 90% LTV. However, AToM would recommend that the couple reduce their LTV to 89.9%, meaning they would need to find an additional £165 for their deposit (taking the overall loan to £148,335) to negate the need to pay the higher fee.

Abbey has a two-year 5.24% fixed rate until March 2 2007 (reverts to Abbey’s standard SVR). There are no extended redemption penalties but there is a £349 arrangement fee. If the applicants wished to redeem during the first two years, they would be subject to an 80-days’ interest charge (this is calculated on the outstanding balance, not the original loan amount). The overall cost for comparison is 6.7% APR.

Lender response
George Patellis is managing director of Preferred Mortgages
Most first-time buyers struggle to save a substantial deposit and often have to borrow nearly 100% of the property price. John and his partner are in the fortunate position of being helped with their deposit by a family member. There is no mention anywhere of any personal savings, so without this generous gift they would find it much harder to take their first step onto the property ladder.

Because the deposit is a gift they have a couple of options available to them: John’s partner’s parents could either pay the deposit directly to the lender, or they could give it to their daughter, but she would probably then be liable to pay tax on it as an individual can only receive a limited amount of money tax-free per year, even from their family. I would suggest they speak to their financial adviser or solicitor about this.

Despite his partner’s lack of debt, John’s credit history means they will probably have trouble getting a mortgage on the high street. Although his CCJ was minor and has now been cleared, it was only satisfied last month and the timeframe will concern mainstream lenders. There is no need to worry though as there are now lots of products that have been specially created for individuals with minor credit problems. Preferred offers a light adverse product called Extra Light that would suit John’s needs as it allows up to £1,000 of CCJs per applicant, including any that might still be outstanding. We also offer a Near Prime product that allows for up to £500 in CCJs but John would need to raise a further 5% deposit to meet the criteria.

John has only been in his job for four months but this would not be a problem for us as long as he has completed his probation period satisfactorily. We would ask John’s employers to provide a letter detailing his salary and confirming that he is no longer on probation. We would also request a standard confirmation of employment/salary letter from his partner’s employer.

Assuming the employer letters and other reference checks are satisfactory, we would be happy to offer John and his partner a mortgage based on their verified income. We could offer up to 3.25 x their joint income, creating a loan of up to £151,125. With their 10% deposit, this means they could buy a flat worth up to £166,237.50 so, happily, the flat they are hoping to buy does fall within their budget.

We could offer Extra Light at 90% LTV, with a discounted rate until January 1 2006. This would provide John and his partner with a good opportunity to get onto the housing ladder despite his recent credit problems and relatively new position of employment.