My partner and I bought a council house through the Government’s Right to Buy scheme on which we were granted full discount.
Our current mortgage is with Nationwide and has been running for approximately one and a half years. It’s a two-year variable rate but we’re hoping to fix for the next three to four years if possible.
We borrowed a little more than we needed when taking out the mortgage as we got planning permission for an extension.
Right to Buy properties need a special type of mortgage and it can affect what you can borrow
Our builder has really messed up on his pricing and budgets and we’re literally spent out with a house that’s unfinished. We’ve not seen the builder since, but that’s another story…
Our current mortgage is £195,369 on a house that’s currently worth approximately £300,000 as it is. When the work is complete we’ll be looking at closer to £375,000.
We would like to remortgage so that we can pay for our kitchen and pay off the credit card as well as allow for a little extra to complete the remaining building work.
We’ve been to see Nationwide and the most they can offer us at this stage is £18,000. We’ve left it for the time being in the hope we can find a lender willing to offer us our asking amount.
We’d like to re-mortgage at approximately £228,000. Is this going to be possible?
Reader, by email
Adrian Lowery, of This is Money, replies: Many banks will not allow homeowners to release equity to consolidate debts (i.e., pay off credit cards) – so that may explain the shortfall in what Nationwide is willing to lend you.
As ever when a household is thinking of taking themselves further in to debt, ask yourself some hard questions: the main ones being, is it absolutely necessary? And is it the best thing to do in the circumstances?
If it is, then can you not get by with the £18,000 that Nationwide is prepared to lend you?
Could you for instance switch the credit card debt over to 0 per cent balance transfer cards so you are not paying any interest, and pay the minimum monthly amount until you can clear them when you are able to sell or remortgage?
Beyond this, there are alternative options out there.
Darren Perry, of specialist mortgage broker Brightstar Financial, replies: This is a good example of a complex situation where a mortgage broker can be very useful.
The borrower knows what they want to achieve but the best way to get there. In this particular case, I had a conversation with the reader to understand the full details of his circumstances and his expectations.
It became clear that the builders had destroyed the couple’s dream home, leaving the project unfinished and the couple without the funds they needed to finish the job.
Perry: Talking to a specialist adviser can help to solve complex situations
In addition, they had bought a kitchen on a ‘buy now, pay later’ basis, setting aside money to pay the balance when it was due.
But as the building costs have increased they have had to dip into these funds and the repayments are due to start soon. They also have outstanding credit card debt.
The cumulative effect of these circumstances is that the couple’s finances are stretched each month and the house is not in an adequate state to secure an appropriate remortgage.
Any solution would also need to consider that the property was purchased using the Right to Buy scheme and is still within the pre-emption period, during which time the council has the right to reclaim its original discount if the property is sold.
This means that a mortgage lender would typically add the discount to the existing loan balance on a remortgage and this would erode any equity available in the property.
In circumstances like these, a short to medium-term solution could provide the funds needed to finish the home improvements and pay the balances for the kitchen and credit card, with a view to remortgaging in the future once the works have been completed and the higher property value can be realised.
The reader had initially considered an unsecured personal loan, which would typically be repaid over a term of five to seven years. Rates on unsecured loans are attractive at the moment, but as the balance is paid off over a relatively short term, the monthly repayments would put a strain on cash flow.
A second mortgage could be the best option
An alternative would be to look at a second-charge mortgage, where a loan is secured on the property. In this particular case, based on the equity available, the reader could try to source a second charge mortgage for an annual interest rate of between 5 per cent and 6 per cent, spread over a 25-year term.
This could ease the immediate strain on the couple’s cash flow, by providing the funds to pay off the kitchen and credit card debt as well as paying for completion of the building work, for a lower monthly cost than an unsecured personal loan.
Interest rates payable on the kitchen and credit card are both higher than 6 per cent, so there will be a short-term gain to reduce the immediate interest costs and the couple would have the funds to finish the home they had set out to build.
It is worth noting that, while a second charge mortgage could provide an affordable way to raise finance in the short to medium term, it can be an expensive way to borrow over the full 25 years.
It would therefore be in the couple’s interests to remortgage the property within a suitable time frame, once the works have been completed, to raise the money to pay-off the second charge mortgage.
This would enable them to switch the debt onto a lower interest rate over the long term.
With this in mind, they should consider any exit fees associated with the second charge mortgage they choose if they are planning to repay the debt early.