Wealth Check: 'Ambition is good, but this is out of reach'

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The Independent Online

Fauzia Begum, 18, receptionist

Personal: Currently taking a year out before starting at King's College London next year. Working as a receptionist to increase savings.

Savings: £3,000 in cash ISA.

Debts: Annual student loan of £6,170. Receiving a grant of £2,700 and a King's bursary of £1,350.

Mortgage: She is hoping to purchase a property in the near future, either for her own occupation or on a buy-to-let basis.

Fauzia Begum, 18, has an offer to study medicine at King's College London next year. She is temping as a receptionist in her gap year to add to her £3,000 savings.

Fauzia lives with her parents, but hopes to buy a property. She is interested in a flat, now in development, costing £249,995. From September, she will receive a student loan of £6,170 a year, a grant of £2,700 and a King's bursary of £1,350. By working weekends and holidays, she intends to save £3,000 a year in a high-interest savings account to pay back the fees.

Fauzia wonders if it would be possible to obtain a 100 per cent interest-only mortgage while either letting out the property or living there and renting out a room.

We sought the views of Kim Barrett of KS Barrett & Associates, Colin Jackson of Baronworth Investment Services and Rob Clifford of Mortgageforce.

OBTAINING A MORTGAGE

Kim Barrett says it is possible to obtain a 100 per cent advance. Age doesn't matter as long as the lender is satisfied there is sufficient income to meet repayments using its own lending criteria, usually three times income. Some lenders will provide a more generous multiple of salary of anything up to five times income, but usually only for a lower loan-to-value multiple.

Providing the applicant is over 18, all lenders use a credit scoring system that relies on the applicant scoring points for lifestyle and habits. Existing credit-card use and being a telephone user score points, but few 18-year-olds will have generated enough points.

Colin Jackson agrees that Fauzia wouldn't find a lender willing to grant a 100 per cent mortgage for a buy-to-let. If she chose a mortgage for her own occupation she has insufficient income before taking into account eventual liabilities such as her student loan. If she were to live in the flat, she may be prevented from letting all or part of it by the terms of the mortgage (though she may be able to take a lodger). If Fauzia was relying on rent to pay the mortgage and the tenants defaulted, or she had a period when the flat was not tenanted, she could not make the repayments. She would need more savings than she has to cover fees, stamp duty and furniture.

Fauzia's most significant challenge is obtaining a 100 per cent mortgage, says Rob Clifford, as buy-to-let loans almost always demand a 15 per cent deposit at least.

EMPLOYMENT

Fauzia simply does not now have the income to buy such a property, says Barrett. A loan this size will generate annual interest of £10,687.28, using a base rate of 1.5 per cent. And Fauzia must still meet the other costs of owning a property.

She could choose to take permanent employment, suggests Clifford, in which case First Active or Freedom Lending might consider her as a buy-to-let borrower, but most lenders impose a minimum age of 21. Some lenders will base the lending decision on rental income, should she let the property in its entirety. On an interest-only mortgage, monthly repayments would be about £800; with a standard buy-to-let rental calculation of 125 per cent of mortgage payment, the valuer would have to agree that the property would fetch at least £250 per week rent.

An option would be to involve her parents in the mortgage as a joint applicant or guarantor. If they can fund an 11 to 15 per cent deposit, some lenders would consider her current personal circumstances and she could expect to get a reasonably priced mortgage deal, such as 5.45 per cent fixed for three years.

GUARANTOR LOAN

Jackson says that if Fauzia is intent on buying a property, she has two options. She could buy jointly with friends or family. However, this can be fraught with danger as the borrowers are jointly and severally liable for the mortgage. If a joint buyer stopped paying their share of the mortgage, Fauzia could be liable for all of it. Also, the joint buyers would need sufficient income; in this case, probably in excess of £70,000 p.a.

An alternative would be for Fauzia to consider a Housing Association property, continues Jackson. Very often these are less expensive and pitched at the first-time buyer.

Ambition is to be admired. In this case, however, Fauzia's ambition is way out of her reach for now.

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