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Remortgage to pay off debt

Types of Mortgages

There are essentially two different types of mortgages
  • Repayment, (capital and interest)
  • Interest only, (ISA, pension or endowment mortgage)

Repayment Mortgage

  • Monthly repayments consist of repaying the capital amount borrowed together with accrued interest. Normally, you will see the amount borrowed decreasing throughout the term of the mortgage.
  • These mortgages can also be known as a capital and interest mortgage.

Interest Only Mortgage

  • Monthly payments to the lender are simply made up of interest. With an interest only mortgage any payments you make to your lender will only go to paying off the interest on the loan and not the loan itself.
  • Interest Only Mortgages tend to be popular, because they offer a relatively cheap way to purchase a house, as the repayments you make are comparatively small.
  • The problem can be that you never actually move forward to pay off the original debt.
  • In order to raise the capital on the property to pay off the mortgage you are advised to invest the money you save on the mortgage payments into a long-term investment fund.
  • On completion of the term of the mortgage, you finally pay off the mortgage using the proceeds of a separate investment vehicle. This could be an ISA, pension or endowment.

Advantages of an Interest Only Mortgage

  • The repayments work out cheaper than a capital and interest mortgage.
  • If the property increases in value and you manage to sell your property, you can still make a profit.

Disadvantages of an Interest Only Mortgage

  • If the property value remains static or decreases over the term, you may end up with negative equity.
  • Negative equity can apply to any mortgaged property.

Options Available

  • In the case of a remortgage, clients should always speak to their current lender for further borrowing.
  • If current lender rejects their application for further borrowings they will need to investigate a re-mortgage with a new lender.

ReMortgages - Points to look for

  • Do you have enough equity in your property for a remortgage?
  • Is your current mortgage up to date?
  • Do you have a steady income?
  • Has the current mortgage any redemption penalties?
  • Are there any secured loans attached to the property?

Loan to Value

  • Loan to value – LTV
  • This is the size of the mortgage as a percentage of the value of the property or the price you are paying for the property. E.g. an £80,000 mortgage on a house valued at £100,000 would mean an LTV of 80%.
Example
  • Clients have a property valued at £90,000.
  • Their current mortgage redemption is £43,000.
  • Based on a LTV of 85% they will be able to re-mortgage to £76,500.
  • New loan = £76,500 – existing mortgage £43,000     =£33,500 lump sum remaining.    
  • Adjust lump sum figure to allow for arrangement fees and solicitors costs. This is on average £1,000.
Endowment ISA Adverse Credit Mortgage

  • This is a life assurance investment policy that is designed to produce a lump sum of money to pay off an interest only mortgage. There are different types of endowments and include ‘with profits’, ‘unit-linked’, and ‘utilised with profits’. As with most investment vehicles’ there is no guarantee the policy will generate enough to pay off the mortgage at the end of the term.

  • ISA- Individual Savings Account
  • This is a tax-free way to own shares or have a cash savings account or life assurance. Depending on the lender you are able to use your ISA to repay an interest only mortgage.

  • Does a bad credit rating mean that you will never be able to get a mortgage or re-mortgage? NO.
  • A bad credit rating can come from a small missed payment or from something major, i.e. an IVA, bankruptcy etc.
  • Regardless of the severity of the problem, adverse credit can make it extremely difficult for you to get a mortgage from mainstream lender.

Is the Current Mortgage up-to-date?

  • Mortgage Arrears
  • Keeping up with your mortgage payments should be your top financial priority.
  • If you fall behind on your mortgage payments, you need to take action straight away.
  • Come to an affordable arrangement with your lender.
  • Make an allowance for the mortgage arrears on the IVA income & expenditure.

Effect of Arrears on Ability to Remortgage

  • Mortgage arrears do not need to be cleared in order to attempt a re-mortgage.
  • If a client has a mortgage with a high street lender and has missed the last three mortgage payments they can still re-mortgage immediately.
  • If a client has a mortgage with an adverse lender and has missed the last three mortgage payments they cannot re-mortgage. The last three contractual payments have to be made before a re-mortgage can take place.

Income/Affordability

  • Most lenders require a borrower to be employed or self-employed.
  • If they are neither of the above they must have income from private pensions.
  • Income multiples may vary from lender to lender.
  • The Financial Services Authority (FSA) recommends that a single person should only borrow up to three times their gross salary and couples no more than two and a half times their gross salary.

Self-Certified Mortgages

  • A self-cert mortgage is one in which you provide the mortgage lender with a declaration of your own income.
  • Self-cert mortgages require less proof than full-status mortgages.
  • A self-cert mortgage is considered a “higher risk” product by many banks and lenders.
  • Most lenders will not normally offer more than 85% LTV on a self-cert mortgage.

Examples of Adverse Lenders

  • GMAC
  • I-Group
  • Kensington
  • Mortgage Plc
  • SPML Southern Pacific
  • Paragon
  • Future Mortgages
  • First National
  • Endeavour Personal Finance

Secured Loans

  • It is essentially a second mortgage on your home.
  • Clients should be aware that this is a secured debt and contractual payments must be treated in the same way as a mortgage.
  • Redemption statement must be obtained for secured loans as well as the first mortgage.

Early Redemption Penalties

  • If a client wishes to re-mortgage and pay off their mortgage company, they may have to pay a fee.
  • The fee may be equivalent to a certain number of month’s interest, or a percentage of the loan.
  • All clients wishing to re-mortgage should provide a redemption statement from their current lender.

Possession Orders & Repossession

  • If a client receives a possession order you will not necessarily lose your home.
  • Courts will only grant a possession order as an extreme measure and believe this should only be done when there is no chance that the borrower can rescue the situation.
  • The matter is adjourned and when all the information is available the court can then make a decision.
  • The possession order is suspended. This means the order is granted.
  • The court feels you are likely to pay the arrears within a reasonable time.
  • If at this stage you do not maintain the repayments towards the arrears then the lender can obtain an eviction warrant without the need for a court hearing.
  • The court will notify you of the period within which you must leave the property.

Order Charging Land

  • What is a Charging Order?
  • A charging order is an order from the court placed on a debtor’s property (house or land) for monies owed to the lender.
  • In basic terms, the unsecured debt becomes secured on your property.

What happens when a client receives a Charging Order?

  • The lender will apply to the court for a charging order, once the court has considered the application and is satisfied with the application; you will receive the order on a N86 form.
  • The form will include information regarding the time and date of the hearing when the Judge will decide if the charging order is to be made final.
  • If the judgement is put in place, you will receive a N87 form (Final Charging Order).  This form will also be sent to the lender. The lender will then need to inform the Land Registry.

SCENARIOS - Remortgage house to pay off debt

Remortgage Example 1 - Remortgage for a one off IVA

Proposed value of house: £120k
Mortgage outstanding on house: £80k
Debts outstanding of £80k
Remortgage of £28k to go as full and final settlement towards the debt outstanding.

Remortgage Example 1 - Remortgage for a one off IVA

Proposed value of house: £120k
Mortgage outstanding on house: £70k
Debts outstanding: £80k unsecured debt
One off IVA @ 90% loan to value £108,000
Less £70k mortgage – leaves £38k for one off IVA

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In the IVA example pictured above, our client was struggling with payments of £600 per month to their creditors. We were able to reduce the payment to £240 per month. After 60 months of paying this reduced amount, their IVA will be complete. Any remaining debts will be written off and they will be able to start over debt free.

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