Sooty and Sue are planning to have a family and need to upgrade from their current one-bedroom flat, worth around £130,000. They also need room for their friend, Sweep, so they are looking for a three-bedroom property around the £250,000 mark. The flat was brought three years ago for £80,000 on a 100 per cent LTV mortgage.
Both Sooty and Sue are actors earning £30,000 per annum on a long-standing television show but Sue plans to give up her job when the family arrives.
They also have £3,000 in savings and no outstanding credit or store card debts. What are their options?
Michael Brill is director at Baronworth (Investment Services)
“Given the fact that Sooty and Sue are planning a family, and that when this happens, Sue will stop working, we have to presume for financial planning purposes that this is imminent, and therefore we can only utilise Sooty’s salary when calculating the amount of mortgage available to the couple.
With just £30,000 salary, and presuming they have no other credit/loans, they could possibly obtain a mortgage of 5.25 times salary (£157,000). They have £50,000 equity in their existing flat, which means that they could only purchase for around £207,500.
The £3,000 they have in savings would be needed towards the costs of moving, for example, survey fee (approx £400), Stamp Duty (approx £2,075), solicitor’s fees (£800), removal firm (£500-£1,000).
They should save as much money as possible before Sue gives up work, to help to pay for the above, and to build up a contingency fund.
As they would only have one income, they should apply for a two-year fixed rate, so that they will have no worries in the early years that interest rates may rise.
I would also recommend that, for affordability, they initially obtain an interest only mortgage. At the end of the two-year fixed rate, they should remortgage for a lower interest rate (if available) and should be looking to converting to a repayment mortgage. However, rather than convert to a full repayment mortgage in one jump, they could obtain 50 per cent repayment and 50 per cent interest only basis, and two years after this they should convert the remaining 50 per cent of the mortgage, so that they eventually have a 100 per cent repayment mortgage. This will ensure their mortgage is fully repaid in 25 years time, and that in converting from interest only to repayment mortgage, their monthly payments do not soar in one jump.
An alternative option for the couple would be to defer having their family until they have saved a higher deposit, which would enable them to purchase the £250,000 property that they desire.”
David Mead is managing director at Flexible-mortgage.net
“There are several unknowns here, one of which is how much deposit do Sooty and Sue have to put down on their proposed purchase? I will assume that they have at least £50,000 as they purchased their current property for £80,000 and it is now worth £130,000. Secondly, will they be renting out the room to their friend Sweep? Thirdly are they self-employed or employed as actors (I will assume that they are self-employed and the £30,000 earnings represent net profits).
As things stand now, the couple will be able to raise a mortgage loan of £200,000 without too many problems, however the main issue going forwards will be affordability, particularly when Sue gives up her job. Alliance & Leicester has a good two-year fixed rate mortgage product, priced at 4.39 per cent with a completion fee of £499, giving monthly payments of £1,101.96 on a repayment basis over 25 years. A mortgage intermediary would need to thoroughly investigate Sooty and Sues’ budgets and the future earning prospects of Sooty before taking this information further and providing any kind of recommendation.
I am probably showing my age at this point, but these clients may well be heading towards retirement age, so this issue needs to be fully addressed as well. Perhaps setting up a good pension plan may be more appropriate.”
Katja Mills is senior mortgage adviser at Thinc Destini
“Sooty and Sue own a property valued at £130,000, and have a mortgage of £80,000 – assuming it is interest only, giving them equity in their home of £50,000. With their expansion ideas, they feel that they need to spend £250,000 on a new home.
Given their limited cash reserves, I would suggest they keep these savings as an emergency fund and use the equity to fund a deposit and the fees of moving. Fortunately, by capping a purchase price at £250,000, they will only be subject to Stamp Duty at 1 per cent. I calculate their moving costs to be something in the region of £7,000, by the time you include estate agents fees to sell, solicitors’ costs and survey fees for the new purchase.
Therefore with a deposit of £43,000, they seek a mortgage of £207,000 with translates to an 83 per cent loan to property value.
With no credit commitments, they require an income multiple of 3.45 times joint salaries, which, given the reasonably healthy deposit, should be achievable with a number of lenders.
The couple should exercise care and affordability should be ascertained both and now and in the future given that Sue intends to stop work when the family arrives.”
