If we break this case down into its constituent ‘problem’ parts:
l 93% LTV required
l an income multiple in excess of 5x is required, where there is virtually no business track record
l a possible restriction on maximum mortgage term due to client’s age
A significant problem is that of the income and the loan to value (LTV). I acknowledge that the client is self-employed, however the high LTV simply means that the client’s income options are limited to almost zero. On the face of it these will be big hurdles to overcome.
While a number of non-conforming lenders do adopt a flexible approach, I have to say that in this case most would apply the principles of responsible lending. The case as presented would seem to be some way outside what would be deemed acceptable.
If the client could secure a mortgage there are many other questions regarding both the mortgage and property that would need detailed answers. First, would it be possible for the client to manage the level of repayments? Second, to what extent would the client be exposed to interest rate risk? Third, the client’s intention is to retire in eight years, will he need to realise the assets of the house? If he does need the assets, he must include in his calculation the fact that house prices may stay static or fall.
It should be noted that there are significant client risks. I might suggest that the client scales back his property ambitions. Why does he need to pay a city centre premium price? Can the client increase his deposit by saving over the next few years?
On balance this is a very difficult case and it is unlikely that many, if any, lenders would consider the case as it stands.
My initial response to a client presenting this scenario would be to tell him to take a reality check and set his sights a little lower, at least as far as his immediate purchase is concerned.
As a self-employed taxi driver he will need to self-certify his income. There are plenty of lenders who will readily accept business along these lines and some who will accept mortgage terms as low as five years.
However, the maximum LTV will be 90% and on this basis, the client’s deposit of £20,000 will not support a purchase of £300,000.
His income, at £50,000, is insufficient too, assuming a multiple of three and a half times. Of course, there may be additional income from other sources to take into account which would allow the client to self certify an income above £50,000 but that would not solve his lack of deposit.
Further, there may be commitments such as maintenance payments from his divorce to take into account, decreasing his disposable income and adding weight to the advice to lower his sights to a property more within his means.
Having purchased a suitable property, ideally with a term that extends into retirement, he can still work towards his objective to retire abroad, while retaining his investment in the UK. He could look to refinance shortly before retirement but may face difficulties in doing so with no committed long-term income.
The simpler option would be to speak to his lender just before he retires and advise his intention to let the property. In most cases, lenders will be ready to accept this arrangement, especially if the account has been well conducted.
Although he is as a self-employed taxi driver, we are not aware of his previous employment record. If he has been self-employed for one year or more his options will be greater.
He has also said that he could increase his income and that would suggest that he has other income or work streams available and that the new qualification is in addition to his existing work. If he is able to prove an income in the region of £80,000 he would be able to achieve a loan to value of 93% on a full status basis. This level of income may not be required by a lender such as Nationwide that works on an affordability calculator, but he would have to have been trading long enough and he would need to prove the income on a full status basis.
However if he has several income streams and no way of proving that income he will need to obtain an additional £10,000 for his deposit to bring the loan to value down to 90%. This would enable him to access the self-cert schemes with either Mortgage Express and Bristol & West, assuming of course that he has been trading for at least one year. Taking the mortgage to age 60 would not be a problem for most lenders, as the minimum term is generally five years. If he intends to retire abroad at 60, then he could select a 10-year term with Mortgage Express as its maximum age is 70, and depending on the product could redeem it in eight years or switch it to a buy to let.
Mortgage Express will allow a maximum age of 75 on buy to let, but the maximum LTV for expatriates is 70%. He would have to hope that in the eight years the property value has increased sufficiently to meet the expatriate criteria and his choice of product would be restricted as exclusive deals are not available on this scheme.