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Feathering the nest
My client is a first-time buyer with an annual salary of £21,000. She has recently inherited £500,000, of which she can use £20,000 for a deposit on her first home. The rest of the inheritance is to be invested to create a fixed income, although this is not yet in place and we are investigating further. Who are the best lenders to speak to, and how much might she expect to be able to borrow?
Gemma Harle: Mortgage Next
4Before answering, a couple of assumptions need to be made. First, it is assumed your client has been in permanent employment and drawing her salary for at least 12 months. It is also assumed the money being invested to generate additional income will be invested and evidence of the guaranteed income can be provided before applying for a mortgage. It is also assumed the money invested generates a net return of approximately £20,000 per annum, which generates a combined income for your client of £41,000 per year.
Based on these assumptions and using Bank Of Scotland’s current affordability calculator, your client could borrow up to £165,000. However, if the mortgage is based on just their income from employment, then the Bank Of Scotland will provide a mortgage of £100,000 based on a high credit score. Bank Of Scotland is currently offering a residential mortgage rate of 5.59% fixed until 31/01/10 with an arrangement fee of £1,499, up to a maximum of 90% LTV.
The additional income from your client’s inheritance could be taken into consideration if she invests her money into two buy-to-let properties. With no outstanding mortgage loans, she will receive potential rental income of approximately £20,000 per year. Depending on her attitude to risk, there are fixed and discounted mortgage products available from Mortgage Express with fixed rates of 5.59% for two years and discounted rates starting from 5.54%. Both products accommodate mortgages with LTVs up to 85%.
Other options are available for a residential mortgage, based upon the additional income from the inheritance and assuming a permanently employed basic income of £21,000.
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Bristol & West, which is offering a stepped fixed rate mortgage for five years, offers a rate of 4.99% fixed for one year, which then steps up to 5.99% fixed for years two, three, four and five. The arrangement fee of £999 can be added to the loan and the deal is available up to 95% LTV with no higher lending charge. Based on income multiples of 4.5x single income and including the additional buy-to-let income, your client could potentially borrow up to £184,500.
Nationwide is also currently offering a tracker product with a payrate of 5.58% for two years. It has a booking fee of £1,499, there is no higher lending charge and the product is available up to 90% LTV. Based on income multiples of 4.25x, your client could potentially borrow £174,250. n
Richard Morea: L&C
4The priority for this client has to be to get the balance of her funds invested as soon as is reasonably possible, because without this additional income, the maximum she will be able to borrow will be limited. Many lenders will be happy to consider income from a variety of sources including investment income, but they will need some evidence to at least show the funds invested, and in many cases, some historic evidence of the income being received. However, depending on the type of property the client wishes to purchase and its location, her earned income may be sufficient to get the mortgage necessary.
Based solely on the client’s earned income, lenders who have stuck with the more traditional income multiple approach when calculating the maximum loan, are likely to apply a maximum multiple of 4x, possibly a little higher, giving a mortgage level of around £84,000. The client’s best option is a lender that uses an affordability calculator to obtain the maximum loan available. Assuming she has no other financial commitments, then it is likely these lenders will prove to be more generous, giving a maximum loan which would be the equivalent of around six times her income – £126,000.
If the client is not planning to buy now and can have her investments up and running by the time she does buy, then she will be in much better shape. Lenders who will take this investment into account are likely to be able to lend the client up to £228,000, if we assume she takes an income of 5% of the capital invested. However, the client needs to consider this carefully and make sure she is comfortable with the monthly repayments of this bigger loan and they fit in with the way in which the investment income is being paid.
Cheltenham & Gloucester (C&G) is worth considering for this route, as it can accept the investment income and will just need proof of the investment portfolio. If she does borrow this higher amount, a deposit of £20,000 would be less than 10% of the purchase price, so she should try to avoid a higher lending charge – again, C&G would be worth considering. n