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.