Some borrowers have had difficulty with credit: they may have arrears with current lenders and even a CCJ or a County Court Judgement over a debt. Every lender performs a credit search on every applicant and so these details will be known to them.
It is a fact of life that those borrowers who had to be taken to Court to satisfy a debt are not popular with lenders, since their attitude to debt is subject to doubt. This may or may not be true for individual applicants. Nevertheless, many lenders will not accept applications from those with CCJs.
But there are a number of specialist lenders who will consider such applicants. They will almost certainly charge a higher interest rate and will only lend on a lower LTV – Loan-to-Value percentage. Lenders differ as to what other references are taken. Some lenders rely only on the property as security, lending say 65% maximum LTV. If the loan is not repaid on time, the lender can foreclose and make a good return on the higher interest rates charged. There are clearly risks to this sort of lending and it is fair that the interest charge is higher.
Paragon Mortgages offer this type of loan but where the initial interest rate premium falls away after a set number of years of scheduled payments without arrears: this is a “fresh-start” type of loan where borrowers who have suffered from problems in the past will not be penalised for ever.
It is still possible to select the best value-for-money deals using the IRR or the NPV but only among the lenders who specialise in this market niche.
Some people find it difficult to prove their income for a variety of reasons, one of which is a simple need for privacy. More normal, is the businessman whose accounts may not totally represent his income. Such applicants can access a few lenders who allow borrowers to state (self-certify) their income without the need for double-checking.
there will be an extra cost to this type of loan in terms of higher interest
rates, commensurate with the added risk of arrears.
As with impaired status loans, the lender in this case is relying more on
the property to repay the loan than your income:
the maximum LTV is therefore likely to be lower as well.
For borrowers with no deposit a few lenders will offer 100% LTV loans, but at a higher interest rates. It is occasionally worthwhile obtaining a lower rate loan at say 95% LTV and borrowing the balance from elsewhere, even your own bank. You effectively have two loans at different interest rates.
this out, work out the melded rate from both sources as follows.
M = (L1
x I1 + L2 x
I2) / (L1 + L2)
and L2 are the two loans at interest rates of I1 and I2
the M, the melded rate in to the “Loan Comparator” spreadsheet as if it was
one product to compare it with any other.
This is another specialist area where a mortgage is required to purchase a property not to live in, but to rent out to someone else. There is a longer section later on, which explains the special attractions of this sector.
There are a
number of lenders who specialise in buy-to-let and, as with the impaired credit
lenders, it is just as valid to apply the IRR and NPV measurements to these
with any more conventional mortgage.
Some lenders only offer what looks like a cheap interest rate provided you take out buildings and contents insurance or mortgage payment protection insurance through their agency. This is a valid method of marketing, although the authorities dislike it since they imagine consumers can be easily duped – although not now they have read this book.
commission from additional insurance policies they sell, and if they can offset
some of this extra income against an interest rate reduction, it could still
work out a good deal for the borrower, who still needs to take out the insurance
with someone anyway.
this out in the Loan Comparator spreadsheet, you will need to enter the monthly
premium. In strictness, you should
only enter the extra premium you would pay, above what you would pay by
going elsewhere, if at all. You can
also compare two schemes with different insurance premiums.
The APR rules do not require buildings insurance to be included as part of the credit costs, even if it is compulsory, but they do require compulsory payment protection insurance to be included. So while the accurate IRR payment can be based on any extra premiums you wish to include, the APR illustrated by the lender may be legally accurate, but possibly misleading as only the statutory extras are included.