Low interest rates and crazy mortgage offers are all very well if you can borrow money easily. But most lenders will reject your application if you have run into financial problems. Although special negative equity packages are widely available, these are usually for existing customers only. If your lender is unwilling to help you out, it can be very difficult finding another prepared to take on your risk.
The problem can be even stickier if you have run into mortgage arrears or run up county court judgments (CCJs) for non-payment of debt. Patrick Bunton, of London & Country Mortgages, says some mainstream lenders will consider borrowers with a history of financial difficulties, but they are few and far between and will still take some convincing. "It depends entirely on the circumstances of the borrower. If you can see a justifiable reason why that person has run into difficulties, the application has a better chance."
For example, people who fell into arrears because of redundancy, but who are now re-employed and paying the mortgage regularly, will be regarded more favourably than those who have had an income coming in but spent it elsewhere.
Mike Beerling, mortgage director of the financial adviser Berry Birch & Noble, says Cheltenham & Gloucester offers the best negative equity scheme for borrowers who want to sell their property and transport the outstanding debt to a new home. This loan will cover up to 125 per cent of the new property's value, with interest at the lender's standard rate. Mr Beerling also likes The Mortgage Business's negative equity deal, which enables people to rent out their home while buying another.
Over the past couple of years, a few lenders have begun to specialise in "problem mortgages". Companies such as Mortgage Express and Kensington Mortgage Company are willing to take on borrowers that other lenders would regard as too high-risk.
Mortgage Express, a subsidiary of the TSB, offers a negative equity mortgage that allows clients to borrow more than the value of a new property. The loan comes at a price. For example, people wanting to borrow 100 per cent of the value of the new home would pay the base rate (currently 6 per cent) plus 1.9 per cent. Tim Dawson, deputy chief executive of Mortgage Express, says: "From the customer's point of view, we're giving them a way to move. From our point of view, we're taking on extra risk, because we are effectively doing unsecured lending on part of the loan."
The negative equity mortgage is initially set up as a repayment loan, so part of the outstanding capital is paid off every month. When the loan has been reduced to 95 per cent of the new property's value, you can switch to an interest-only mortgage, supported by an endowment policy, personal equity plan, pension or any other product that can serve as security.
If you have had bigger financial problems, Kensington Mortgage Company specialises in people with a history of CCJs and arrears. It separates such borrowers into three classes: employed with up to two CCJs and/or up to six months' cleared arrears; self-employed with up to two CCJs and/or six months' cleared arrears; employed or self-employed with up to three CCJs and/or 12 months' cleared arrears. Its charges again reflect the extra risk. Rates are linked to Libor - a money-market interest rate that generally follows base rates - plus 3 per cent, or 5 per cent if the borrower is in arrears.
Self-employed and short-term contract workers may well be seen as a problem. Banks and building societies normally like borrowers to have at least two, and preferably three years' worth of accounts to prove their income. Meanwhile, short-term contract workers may need a bigger deposit. But Robert Sharpe, operations director of Portman Building Society, says: "A well- prepared mortgage case, supported by an employment history and documentation from the employer showing a history of linked contractual employment periods, will ease the processing of an application."
A positive response to negative equity
A HANDFUL of lenders specialise in negative equity mortgages for people looking to move, but often the best option is to talk to your current lender.
Deborah and Didier Colombeau from south London approached several of these specialists without success before talking to their own lender - Bank of Ireland Mortgages.
Mrs Colombeau says: "We moved into our first-floor flat in 1989, but in 1993 I became pregnant. Going up and down 69 stairs was no fun."
The Colombeaus discovered that the flat's value had fallen well below the original buying price of pounds 63,000, so they decided to rent it out for a year. "After a year we moved back, hoping we'd be able to cope, but it's been awful trying to carry a 22-month-old baby and a pushchair up the stairs," says Mrs Colombeau.
Six weeks ago she decided to write to the managing director of Bank of Ireland Mortgages to explain her family's problems. "I suggested that we carry on with the same mortgage, but on a different property - a ground- floor flat with a garden. After all we've been paying that mortgage for the last six years without any problem."
The Bank of Ireland gave its approval within a few days, and the Colombeaus have now put their flat on the market.
Steve Dilworth, head of corporate affairs for the lender, says: "A lot depends on the individual's circumstances. If the borrower has been a good customer, up to date and prompt with payments, we will try to take a sympathetic attitude."
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies