Alan Lakey is senior partner at Highclere Financial Services
“Allowing for fees, the potential loan required will be between £158,000 and £198,000. It is assumed that Larry’s £45,000 income is net profit as opposed to gross. If correct, and if there are no other financial commitments, this equates to a maximum of 2.75 times joint incomes, which the majority of mortgage lenders will consider. If this is gross income, then precise net income figures will be required.
The problem of a falling income is best dealt with by ensuring the loan amount is at the lower end of the scale. Additionally, it would be sensible to borrow as much as possible allowing some of the savings to be retained as an emergency fund. A loan of £171,000 can be arranged (95 per cent of £180,000) which allows a retained emergency fund.
A fixed rate mortgage for around three years would provide protection against any unwelcome interest rate rises and Larry and Cheryl may also wish to consider an interest only mortgage linked to an Independent Savings Account (ISA). This enables a more flexible approach whereby the total monthly outlay can be reconfigured as necessary. An interest only loan of £171,000 with Accord Mortgages at 4.98 per cent equates to monthly interest of £709.65. An ISA saving of £290 would also be required together with essential life and critical illness (CI) assurance. Finally, Larry should also consider the financial implications of long-term sickness and arrange an income protection plan.”
Adrian Kidd is an IFA at Mint Financial Services
“Looking at the combined wages, the clients could comfortably get the maximum loan they are looking for. One consideration would centre around the higher lending charge (HLC) imposed.
Halifax, for example, has a tracker rate at 4.49, which has total fees of £3,500, mostly made up of the HLC.
Woolwich has a tracker at 4.79 per cent with total fees of £835.
It is only a £34pm difference, but the Woolwich deal strikes me as being far better for the clients.
To protect against rate rises, they should take a fixed rate mortgage. Nationwide has a decent fixed rate for two years at 5.28 per cent. Again, no HLC is payable.
If Larry is uncertain he is able to maintain his salary, it sounds as if he is self-employed. He should make sure he has an income protection policy to protect him should he be unable to work due to ill health or an accident. Cheryl could protect against unforeseen redundancy. These two valuable policies would provide some peace of mind.
The other consideration would be looking at a property price they can realistically afford. Just because your salary multiples allow you to borrow £200,000 plus does not mean you should. Part of the reason why many people get into difficulty is because they have bitten off more than they can chew financially.
Be realistic, look at how much you can afford to pay and still have a social life and pay your other regular monthly expenditure. If, at the end of the month, you are in the red or close, you may be borrowing too much.
Resist the temptation to get an interest only mortgage just because its cheaper. If you can afford a repayment deal, get one. At the end of term it will be paid off, whereas most people on interest only do not have a method or funds to repay the mortgage apart from the sale of the property.
It’s great to get on the ladder but you should be trying to improve your situation, not potentially damage it going forward. Be smart – you can buy that dream house further down the line. If you remain sensible and are well advised, it should prove to be a great starter home and good investment.”
Jonathan Cornell is technical director at Hamptons
“One of the key issues here is Larry’s concerns over his earnings. As he is self-employed he would not be covered by mortgage payment protection insurance (MPPI). There are two options. One would be to keep some savings aside in case his cash flow suffers – this could be used to pay the mortgage during lean times. The other would be to take out a mortgage which allows overpayments. That way Larry and Cheryl could build up some savings within their mortgage. This would have some advantages as they both earn, any savings would be taxed and it is unlikely the interest rate on their savings would exceed the interest rate on their mortgage.
Another issue is Larry’s earnings as it is unclear whether the £45,000 is net profit or turnover. If the latter, we need to know his net profit as that’s the figure mortgage lenders would use to work out how much her can borrow. We would also need to know if he has audited accounts, if not he may need to take out a self-certified mortgage.”
