Alec and Clare have lived in a rented flat since they were married four years ago and they have approached Western Bank to discuss the possibility of obtaining a mortgage. They are hoping to purchase a small leasehold flat which they have seen, having successfully negotiated a £2,000 reduction in the original asking price of £122,000. The flat is one of two above a high street shop, and has an unexpired lease of 75 years. Each flat and the shop comprise equal floor areas.
They are both in full-time employment, earning guaranteed basic salaries of £25,000 and £22,000 respectively. Clare also receives £2,000 per annum from a lifetime trust fund. They have asked the adviser for some information on equity individual savings accounts (ISAs), as a friend has suggested that it might be a good idea to use one of these as the repayment vehicle for an interest-only mortgage.
Alec is expecting a substantial salary increase when he completes his training in two years’ time, but until then he and Clare wish to know the maximum monthly payment that they will be required to make. They also want the cheapest valuation option offered by Western Bank.
The vendor has advised them that legally the freehold for this flat cannot be purchased. The bank’s lending criteria are 3 x the main income plus 1 x the secondary income, or 2.5 x joint incomes. Additional security is required if the loan-to value ratio exceeds 90%. The lender has also stated that it requires the loan amount to be protected by life assurance.
So that’s the briefing and if you took on board all of Sam’s 17 tips from earlier you ought to be visualising yourself with these clients. Sam, what are some of the key points wit this case study.
Quite a few really. They’ve been renting before and now want their first place. They’re both employed, not earning a fortune, but Alec is expecting a big pay rise and have settled on a flat above a shop. It’s leasehold and the lease has only 75 years to run. I wonder what the shop is below? I would imagine some questions on the leasehold and the law surrounding this as they’ve made a point about the freehold. It’s just full of potential questions and rather exciting.
So what you’re doing is thinking through the case study and predicting the type of questions that’ll come up?
That’s right Peter; this helps you to focus your mind.
Any other key points?
Yes…Clare has some extra income from a trust fund which needs to be checked. They quite fancy an interest only mortgage with an ISA.
So brush up on your ISA knowledge eh?
I would expect this to be questioned, yes. Typically the lender has very cautious income multipliers – that’s standard CeMAP style.
OK, let’s have a look at the first question. Remember listeners, have a look at the paper in front of you. You’ll find this on the inlay card in the case where you got the CD from.
