Money: A 'bad risk' and the big picture

A 'no-hope' loan applicant can still buy a flat - with the help of his parents' assets

The borrower

Andrew Buurman is 31 and a freelance photographer. He is a first-time buyer and has agreed to pay pounds 90,500 for a flat in Westbourne Park, West London. He has only been working for himself since September but expects to earn pounds 30,000 in his first year. Previously he worked for a national newspaper on a salary of only pounds 12,000. Andrew wants a mortgage for 95 per cent of the property's pounds 90,500 price. He has no other savings and has pounds 7,500 of personal loans outstanding, which cost him pounds 270 a month.

Andrew's father, who has just taken early retirement but who plans to secure well-paid contract work as a computer programmer, has offered to guarantee the mortgage if needed. Mr Buurman senior's current income consists of a pension of pounds 14,000 a year; he owns a property worth almost pounds 500,000 on which there is a remaining mortgage of around pounds 40,000.

The advice

While Andrew's income looks as though it is going to be very satisfactory, virtually no lender will consider giving a loan to a self-employed individual who is not contracting his or her services for a set fee for a set period of time (a computer programmer, for example). Even still, a 95 per cent mortgage would be extremely hard to arrange in such a case. Realistically, Andrew could not hope to arrange a mortgage until he has two years of accounts. As he wants to buy the property now and has only a pounds 5,000 deposit, another solution is required.

The only way forward would be to rely on Mr Buurman senior, who has offered to guarantee the loan. Unfortunately, after covering the commitment to his own mortgage, Andrew's father's guarantee would only cover a mortgage of around pounds 14,000 and, if Mrs Buurman's income were included, a mortgage of perhaps pounds 40,000 - well short of the pounds 85,000 required.

The solution may rest in Mr Buurman's house, which is believed to be worth close to pounds 500,000. Subject to family approval, I would suggest that Mr and Mrs Buurman take out what is called a Shared Appreciation Mortgage with the Bank of Scotland. This mortgage allows parents to assist children to buy their own homes without "selling off the family silver".

It works like this. Assuming that the property is valued at pounds 500,000, the Bank of Scotland will offer up to 25 per cent of its value - pounds 125,000 - on an interest-free loan basis to the Buurmans in return for a 75 per cent share of future growth in the value of the family home. Importantly, the bank gets no part of the property's current value - hence the "appreciation" in the name.

After repaying their outstanding pounds 40,000 loan to NatWest, this would leave around pounds 85,000 cash available for the Buurmans to lend to Andrew so that he could buy his flat for cash.

In the meantime, the Buurmans' existing mortgage payments of pounds 260 a month will come down to zero, assisting their cash flow as Mr Buurman is now retired. Mr and Mrs Buurman would continue to pay their endowment, which is due to mature in two years, and could choose to use that money for whatever purpose they deemed suitable at that time.

I would recommend that Andrew then pay the equivalent of the cost of an pounds 85,000 mortgage at the standard mortgage rate (around pounds 650 a month) into a savings account. This will do two things: it will build up a fund to pay his father, perhaps pounds 15,000, in two years' time; and it will allow Andrew to prove to a future lender his ability to maintain a regular mortgage. When the time comes to refinance the flat two years on, he will have the necessary two years of accounts.

The downside of the Shared Appreciation Mortgage, which is a unique deal in the mortgage market, is faced when Andrew repays his parents' loan. If the Buurmans choose to reduce, or redeem, the Bank of Scotland mortgage at this point, they will have to repay both the pounds 125,000 and 75 per cent of any growth in the value of that property between now and that point, as defined by two independent valuers: that is, if the property is thought to be worth pounds 550,000 in two years' time, to repay the entire loan would cost pounds 125,000 plus pounds 37,500, the latter sum being 75 per cent of the value growth.

Clearly, Andrew's savings in the meantime would go a long way towards paying the extra cost in addition to the cash-flow savings the Buurmans would have made. If property prices rise dramatically in the next two years, this could be awkward and expensive.

Alternatively, if property prices fall then the cost would be only a 1.5 per cent fee in the first three years. Importantly, the Buurmans have the potential advantage of being able to choose when to refinance the deal to keep down the effective cost to their wealth.

Of course, this plan of action is a gamble on property prices and would normally be offered to borrowers who are a little older than the Buurmans, who are asset rich and income poor and who do not want to move homes.

However, this is the only way to finance Andrew's flat straight away rather than waiting to buy the property.

q Andrew Buurman was talking to Simon Tyler.

If you want to be considered for a mortgage makeover, or a wider financial makeover, for publication - including a photograph - write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, or fax: 0171 293 2096 or 2098; or e-mail: S.Lodge@independent.co.uk.

Please include details of your financial position and a daytime telephone number, and say why you think you need a mortgage makeover.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Almost 15,000 people died last winter through living in cold homes that they couldn’t afford to heat

Social tenants locked into energy tariff for 40 years

Many Londoners who live in social housing estates are not allowed to switch because their landlord has ‘locked’ them in to buying from one supplier

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Labour will raise the national minimum wage to more than £8 an hour by October 2019 (EPA)

Barclays new Blue Rewards hands cash to customers. What’s the catch?

Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month

New research reveals that despite the recovering economy, four out of five low-income households have seen no sign of their financial situation improving

Hard-up families could be eligible for financial help

A charity is urging anyone struggling financially to see if they could get help from the state

When is the best time to buy foreign currency?

Video: With an election looming, a hung parliament could hit sterling

General Election 2015: Vote for the party that will boost your finances

Experts warn that the general election is unlikely to lead to stable markets. Simon Read talks to two investment managers who are advising caution
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

    £20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

    Ashdown Group: Marketing Executive - 6 month FTC - Central London

    £25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

    Ashdown Group: Junior Project Manager (website, web application) - Agile

    £215 per day: Ashdown Group: Junior Project Manager (website, web application ...

    Guru Careers: Software Engineer / Software Developer

    £40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before