Mike Pendergast is an IFA at Zen Financial Services
“Depending on the amount and rate of the ERC, Gail Storm could either go for a switch to a non-conforming lender, or a secured loan. This depends on the ERC, and also the current rate on the mortgage compared to that which would be offered by a non-conforming lender.
For example, if we take a mortgage of £100,000, a current rate of 5 per cent and an ERC of 2 per cent, the client is paying circa £5,000 a year in interest and the redemption penalty would be circa £2,000. If a non-conforming lender would lend at 6.50 per cent, the client would then be paying £6,500 per year, plus a further £1,950 per year on the extra funds released. She would also have to pay the redemption penalty (£2,000), meaning that the first year costs, in terms of interest and penalties, of a new mortgage would be £10,450, which is £5,450 more than the existing arrangement.
It is therefore likely that she would be better served taking a secured loan with a low ERC, keeping this until the ERC on her existing loan has expired, and then switching the two amounts onto a new mortgage – hopefully by this stage Gail’s credit rating will have improved and she would be able to get both amounts on a reasonable rate with no ERC to pay.”
Steve Wright is head of new product development at GE Money Home Lending
“I believe Gail Storm’s best option may be a secured loan. Another alternative would be to remortgage. However, as well as paying an ERC on the client’s current mortgage, consideration needs to be given to valuation fees and legal fees. It is also possible that due to the recent credit profile, Gail will be paying a higher interest rate on the whole of the new mortgage arrangement.
Should this option prove too costly, then the best option could be a secured loan via a second charge. Specialist lenders like First National and igroup can help in situations such as these, as the amount they lend is assessed using flexible affordability models.
Clearly, the best option would depend on the size of the outstanding mortgage balance, ERCs, loan-to-value, and the current interest rate.
One last alternative option, time allowing, would be to wait for Gail’s current mortgage lender to reverse its decision not to lend as the existing mortgage account continues to be conducted satisfactorily.”
Alan Lakey is senior partner at Highclere Financial Services
“Realistically Gail has two options: remortgage to a non-conforming lender, or arrange a secured loan.
Without knowledge of the mortgage size and property value it is difficult to be other than vague but Gail needs to be aware that by remortgaging she will be penalised by her existing lender, possibly six months’ interest payments. Additionally she will incur fees which could easily run to £2,000. Just as importantly, the entire borrowing would be at a higher interest rate.
Assuming a £150,000 mortgage, this could easily translate into an additional £100 per month without including the cost of the additional borrowing.
Any remortgage will tie Gail to the new lender for three years so, on balance, I would recommend a secured loan which enables the existing Base Rate mortgage to be maintained. This will also allow her to remortgage, penalty-free, in two years by which time the problems will be less likely to impinge on her fund-raising capability.
A secured loan will attract a higher interest rate, but this will only be on the additional £30,000. This route also avoids ERC and remortgaging costs.”
