Money: Mortgage Makeover - I've got to escape my fixed rate loan

Simon Tyler raises a lone mother's spending money
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The Independent Online
Lesley Simpson, 31, is a full-time mother living with her her nine-month-old son, Larry, in west London. Before giving up work she was a sales co-ordinator for a telephone sales firm. Now she plans to stay at home with her son until he is at least three.

While working, she bought a flat and currently owes pounds 47,500. The flat is now worth almost pounds 100,000. At the time, a fixed rate of 9.69 per cent for 10 years (with TSB) seemed competitive, and Ms Simpson pays pounds 427 a month.

The problem

A fixed rate of 9.69 cent is bad enough. But Ms Simpson is caught in a distressing mortgage situation because she is relying on state benefits geared to variable interest rates to pay the mortgage. "Every time there is a drop in interest rates, I actually have higher payments to meet," she says.

Ms Simpson is living on income support, backed by income support for mortgage interest (ISMI) payments. Under benefit rules, the amount paid out in ISMI is linked to variable rates from leading lenders. Every time mortgage rates fall, Ms Simpson's mortgage support is cut - despite the fact she still has to pay out the same amount for the fixed-rate mortgage.

The mortgage is pounds 427 per month, and currently her income is pounds 350 per month in income support, pounds 56 in child allowance, plus pounds 245 for ISMI. This means she has just pounds 229 to live on after paying the mortgage. Her income has dropped by pounds 50 per month since the beginning of the year. If she does not remortgage soon, last week's cut in rates will hit her once more.

Ms Simpson says: "So far I have managed to keep up to date with the mortgage but would like to switch to a lower rate. I do not have any savings to speak of, so I would be looking for a deal with cash back or no legal and valuation fees."

The solution

We looked at Ms Simpson's case and found a way to re-mortgage so she will almost double her disposable income - from pounds 229 to pounds 429 per month.

Normally, lenders avoid helping people on benefits to re-mortgage. We spoke to many lenders, and most of them would not entertain a deal for someone in this situation. But because Ms Simpson has about pounds 50,000 of equity in her property, and has been able to keep up her repayments, she is in a better position than other people living on benefits. Also, her father has offered to act as a guarantor, and lenders that take a closer look at her situation will see the long-term situation is very promising, as Ms Simpson plans to go back to work.

Another possible deterrent to remortgaging is that the rules on claiming ISMI have changed since Ms Simpson took out her loan. This is a complex area and we checked thoroughly with the DSS and the Council of Mortgage Lenders.

Anyone in the same situation must get their case looked into before proceeding with a remortgage, otherwise they could easily lose their entitlement to state benefits.

In short, anyone who has been receiving ISMI benefit for less than nine months would lose future benefits until nine months have passed from the time when they stopped working. Ms Simpson should be able to remortgage without loss of benefit because she has been receiving ISMI for more than nine months.

During an extensive search, the lenders we found most sympathetic to Ms Simpson's case were all mutual building societies. Looking into this case has demonstrated the benefits that building societies can offer to those who don't conform to the types recognised by big banks and other new lenders that are set up to maximise profits by cherry-picking the most lucrative customers.

The society that agreed to help is the single-office National Counties building society, based in Epsom. The National Counties has a fees-paid mortgage, which would suit someone with no spare cash to pay remortgage costs. The deal offers 1 per cent off standard variable rates for three years - borrowers currently pay 5.85 per cent on this deal. However, this is under review after last week's base-rate cut. Although the society charges a pounds 100 booking fee, the valuation and solicitor's fees will be paid and the pounds 100 fee is refunded on completion.

The current mortgage balance is pounds 47,500 but Ms Simpson would have to pay Lloyds-TSB a redemption penalty of pounds 2,350 for moving the loan early. This can be added to the loan so she should re-mortgage for pounds 50,000.

Another tip for people in low-income situations is to swap loans to an interest-only agreement on a temporary basis. In Ms Simpson's case doing this will reduce her payments from pounds 427 to pounds 230 per month (including Miras). This will increase her monthly spending budget from pounds 229 to pounds 429. Once she returns to work, she should renegotiate the deal to a repayment basis over 20 years. This will increase her payments to pounds 360 per month, assuming interest rates have not changed.

If you are suffering on a fixed-rate mortgage, but relying on ISMI, you should at least look into remortgaging. Speak to your existing lender first, because it should be in its interest not to allow its borrowers to fall behind with their mortgages - a real danger for those on high fixed rates while interest rates are so low and the ISMI calculations are based on variable rates. If you get a frosty reception, you may have better luck at building societies.

The verdict

Ms Simpson is very pleased with the advice. "The adviser has come up with some very good options and has also provided me with much greater negotiating power with my own bank. I will now definitely be switching to a lower rate."

n Simon Tyler is managing director of independent mortgage brokers Chase de Vere Mortgage Management, 0171-930 7242.

n If you would like a mortgage makeover, please send details of your personal circumstances and current mortgage (if any) to: Mortgage Makeover, Personal Finance, Independent on Sunday, London E14 5DL. Or e-mail to i.berwick@independent.co.uk. All participants must agree to having their photo and brief personal details appearing in the paper.

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