Hilary and Stefan have an interest-only mortgage of £95,000 with the Northwood Building Society taken out over 25 years on a property which is owned on a joint tenancy basis. A low cost with profits endowment policy was been arranged as the mortgage repayment vehicle. It has 10 years to run and is currently projected to have a shortfall of £15,000 on maturity.
Six years ago, Hilary and Stefan took out a secured loan for £11,500 from Plumtree Finance in order to carry out some essential repair work to the house and to fit a new bathroom suite. Repayments on the loan are £210 per month.
Stefan is employed as a full-time technical helpdesk consultant earning £35,000 per annum. Hilary works as an operations manager for a large furniture manufacturer earning £25,000 per annum.
Stefan’s net monthly income is £2,240 and Hilary’s income after deductions is £1,630.
They have 3 children, John aged 19, Paul aged 15 and George aged 13 who all live at home.
Four years ago, their mortgage account fell into arrears as a result of Stefan becoming redundant from his job. However, he later found the job he is currently in, and arrears were eventually repaid.
Hilary and Stefan now wish to take a further advance from Northwood Building Society of £25,000 to finance an extension and further home improvements. They estimate that the work, when complete, will increase the property’s value to £360,000. They intend to make a contribution from savings of £4,000.
For affordability purposes, Northwood use an interest rate of 7% which means a mortgage cost of £7.05 per month per £1,000 borrowed, and borrowers are restricted to committing a maximum of 80% of the net free disposable income each month to their mortgage arrangements. As well as taking account of committed expenditure, Northwood Building Society carries out a statistical assessment of outgoings, using a figure of £750 for a couple, plus £140 per additional household member.
Assuming that affordability can be proved, the lender’s maximum lending criteria is 4 times main income plus 1 times second income, or 3 times joint incomes. It also requires the payment of a higher lending charge to cover the cost of a mortgage indemnity guarantee where the loan exceeds 75% loan to value.