Natalie is an actress and owns a former local authority flat worth £220,000, which she bought under the right-to-buy scheme. She has an Abbey National interest-only mortgage for £107,000. With the recent interest rate hike and the possibility of more to come, she is keen to find a two-year fixed-rate loan, taking out an extra £20,000 for renovation work. Initially she would like it to be interest-only, then change to a repayment mortgage in six months’ time.

Cath Hearnden, of MyMortgageDirect, says: As Natalie is still in the right-to-buy period (see below), she should make sure that the local council will agree that she can borrow more money, because this could affect the money it could get back from the property if it had to be repossessed or sold. Most local authorities will provide a written agreement as long as the money is for home improvements. Natalie should get this before applying for more money on her mortgage.

Not all lenders will accept right-to-buy flats, and therefore it would be advisable for Natalie to approach a broker who has knowledge in this area. It would be useful for Natalie to find a lender who is happy to fast-track her application because her ability to prove her full annual income will vary at different points in the year and the only way she will be able to prove her full income is to provide her accounts, which can cause delays if they are not finalised for the year.

Natalie could stay with her existing lender and borrow more money and this can be done by contacting the Abbey direct. However, there are some good fixed rates available that offer a free valuation and legal fees; these could be more attractive than a rate offered to her as an existing borrower. This does not mean that she should be limited to these deals because sometimes a cheaper deal with some associated costs can be more cost-effective.

Most two-year fixed rates will take the interest-only payment just over the £500-a-month budget. However, after the interest rate rise from the Bank of England this month fixed rates are rising and Natalie must be prepared to move quickly to secure one of the fixed-rate deals that are still available. Otherwise, the 0.25 per cent increase in rates would cost an additional £20.83 a month for every £100,000 borrowed.

It should be no problem to change to repayment after six months, although there could be an administration charge made by the lender. Natalie should make sure that she does make this change as paying interest only does not reduce the debt and costs more over the full term than a repayment mortgage. My Mortgage Direct: 0800 9530606





JARGONBUSTER

What is right to buy?

The scheme was first introduced in 1980. It enables local-authority tenants with at least two years tenancy (or five years in the case of public sector tenants who took up their tenancies after January 18, 2005) to buy their homes at a discounted price.



How much discount am I entitled to?

The discount increases in proportion to the years you have been a tenant. The maximum discount is £38,000.



What happens when I sell my property?

You can sell your home whenever you like. However, you may have to repay some or all of the discount if you sell within three years (for right-to-buy applications prior to January 18, 2005) or five years (for right-to-buy applications received after January 18, 2005).

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