Dear Delia

Dear Delia Naomi has sold her buy-to-let property and is looking to buy again with Paul, her partner. They have found a property for 145,000 and Naomi is putting down a 52,000 deposit. They have a joint income of 45,000.

Paul has two CCJs – one for 700 recorded 18 months ago and one for 450 seven months ago, both satisfied. He has two defaults totalling 460 and three months’ mortgage arrears, both 18 months ago. What options are available to them? Delia says: Past credit problems can be an issue but are not insurmountable. Here to help are Cate Hillis of Preferred and Julie Sides of BDS Mortgage Group.

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

Intermediary Response
Julie Sides is group product manager at BDS Mortgage Group

Naomi is looking to borrow 64% LTV. The profits on the sale of her buy-to-let are subject to Capital Gains Tax payable by December 31 2006.The CGT will be based on the total profit made over the annual CGT exemption allowance (8,200 for 2004/2005). The net profit is added to Naomi’s annual income to calculate the tax band and rate.If the profit after exemption allowance deduction brings Naomi into the higher rate tax bracket she will pay 40% on all or part of her profit.

Naomi can deduct the cost of selling the property and the cost of any improvements she has made. But if 52,000 is all her profit from the sale, Naomi could have a tax bill of 17,500.

Once CGT liability has been catered for, Naomi could be looking at around 75% LTV. I would suggest, as Paul has a history of adverse credit, Naomi gives serious consideration to purchasing the property in her sole name. This would almost certainly mean she would have the pick of the high street lenders and products available to her such as Bristol & West’s 4.29% rate fixed until December 31 2007 with an early redemption charge of 2% until December 31 2007 and a 399 arrangement fee.

She should also seek independent legal advice as she and Paul are not married and the deposit is hers. Although it is not stated how much of the 45,000 joint income is earned by Naomi, at such a low LTV most lenders will consider upward of 4 x income which means she only needs to be earning around 23,250 to be considered. Naomi could then think about registering a Deed of Trust or a Class F Land Charge to secure Paul’s interest in the property until such time as his credit file is clear and the property can be transferred into joint names.

If Naomi insists the property is purchased in joint names, there are numerous specialist lenders willing to consider previous CCJs and defaults. It is not clear whether Paul still has a mortgage and if he does, and is not intending to sell this property, it could have an impact on any new application. Gmac-RFC would be willing to consider an application from them both and allow Paul to rent out his existing property providing the rental income covers the mortgage payments by 125%. Through BDS, Gmac-RFC would be able to offer Naomi and Paul a 5.34% discount rate until September 1 2007 with an erc and a 495 arrangement fee.

Lender Response
Cate Hillis is head of product development at Preferred

As Naomi and Paul aren’t married and she seems to be providing the whole deposit for their purchase, I would suggest she speaks to a financial adviser before proceeding.

It would be wise for her to put a legal agreement in place to ensure Naomi’s investment will be secure in her name should the relationship with Paul break down.

Paul’s credit history may be causing problems with high street lenders but it won’t stop the couple from buying. There are still plenty of options available to them. Preferred offers a near-prime product suitable in this case, as it caters specifically for customers with a small amount of adverse credit.

As Paul’s CCJ for 700 was registered over a year ago and has already been satisfied it won’t affect his application for this product. His more recent CCJ (seven months ago) is of more interest to us but as it was for less than 500 and has already been satisfied, it also fits the criteria of our near-prime range.

Unlike some other sub-prime lenders, Preferred ignores all defaults (no matter how recent) across our entire product range so the 460 Paul has in defaults won’t impact on the application. Finally, as Paul’s three months of mortgage arrears all occurred over a year ago, they won’t cause any problems either.

As Naomi and Paul have a large deposit to put down, they require a mortgage of just 65% LTV. This is a relatively low band and, as such, isn’t always offered. But Naomi and Paul will benefit from its recent introduction across the Preferred product range, including near-prime.

With a deposit of 52,000 to place against a property worth 145,000, Naomi and Paul need to borrow a further 93,000. Their joint annual salary totals 45,000 so there is no problem in borrowing just over twice that amount, so long as they can afford the repayments when their other outgoings are taken into account. Should they want to, they could in fact borrow up to 3.25 x their joint salary (up to a total of 146,000).

On a standard verified near-prime mortgage (based on LIBOR at 4.58%) with a discount of 2% for the first year (from the date of completion), we could offer Naomi and Paul a starting rate of just 4.33%.

This competitive rate would give them the chance to buy their first property together despite Paul’s poor credit rating. In a few years’ time, provided they keep their finances in order, their credit history will have improved and they will be able to return to a high street lender in a much stronger position.