How can I rid myself of this millstone?

DIANE MACFARLANE

Age 33

Lives in Rochester

Occupation Civil servant

Earns £19,600

Mortgage £36,000

Debts £2,000 on credit cards, £4,000 personal loan

Savings £1,000 in instant access account

Pension Occupational scheme

Aims To solve mortgage problems and clear debts

Diane feels she is part of a forgotten problem. Ten years ago, in August 1990, she became the proud owner of a studio apartment in the Medway Towns, which cost her £39,950. But things soon started to go pear-shaped. Within a year of her moving in, the prices of apartments in her block started to drop, slowly at first and then ever faster.

After about two years, owners had begun moving on and properties were either sold or rented out. Diane believes many of the original purchasers had their apartments repossessed. By 1997, the flats were being sold for £15,000, and she was the only owner- occupier left.

In 1992, she had approached her lender, the Yorkshire Building Society, to find out what help or advice they could give about her rising negative equity problem. They said they had no policy on negative equity. Realising she had no alternative, she went on paying her mortgage and her endowment premiums to Winterthur. By 1997, she was desperate to move to a larger property. So she went back to the Yorkshire.

She says: 'This time they did have leaflets, but they were of no practical use to me. They told me that if I wanted to move, the maximum negative equity I could take with me was £9,000. This was no good because my negative equity was nearly £20,000.'

In the end she decided to move out and rent a larger place for herself and find a tenant for her apartment. 'When I told the building society I wanted to let the property, they said they would charge me an extra 1 per cent on my mortgage, and they have done so ever since. They really don't seem to have been interested in helping me at any stage.'

Since she started letting out the property she has had tenants at most times, but on one occasion she had to wait four months to find a new one. That is when her credit card bills started mounting, because she was having to pay both her own rent and the mortgage.

The recent rise in property prices in the South-east has boosted the value of her apartment, but she believes it is still only worth around £25,000. She would dearly love to get rid of it and buy a small house of her own, but that would cost around £68,000 to £70,000.

Her endowment is another disappointment to her. She says the last notification showed it was worth just £5,000, even though it has been running for nearly 10 years. She is waiting to hear whether it is on track to pay off her mortgage at the end of the term, but is pessimistic.

Her main priority is to do something about the apartment. 'It has been a real millstone round my neck. It has pulled me off the housing ladder and I would really like to get back on it again.'

Adviser 1: Ray Boulger

Based on her desire to buy a house for £68,000 to £70,000, Diane's options are limited.

It will be impossible to do this without getting outside help or selling her endowment policy. She will lose out if she surrenders her policy, but will just about be able to buy the type of property she desperately wants and get back on the housing ladder. Over the long term, the profit she is likely to make on the house may compensate her for selling her endowment policy.

If Diane sells her studio for £25,000, after allowing for costs she will have to find about £12,000 to pay off the mortgage; £5,000 of this could come from the endowment policy, leaving £7,000 to find. She could finance this and refinance her other borrowings of £6,000 with a 10-year personal loan for £13,000. The cheapest lender offering a loan over 10 years at present is NatWest.

Her £1,000 savings would almost cover the stamp duty and legal costs, but she would need a 100 per cent mortgage. Northern Rock would lend her up to £67,000 on its Together mortgage. In addition to a reasonable variable interest rate of 7.29 per cent, there are no arrangement fees, no mortgage indemnity guarantee premium, no redemption penalties and no compulsory insurances.

Based on current interest rates, her mortgage and loan repayments would be just over half of her net income. She should go ahead only if she is confident she can afford these monthly payments.

Ray Boulger works for independent mortgage adviser John Charcol

Adviser 2: David Hollingworth

One possible solution for Diane is Northern Rock's Together scheme, which allows 95 per cent of property value to be borrowed on a secured basis with a further 30 per cent unsecured.

This could work well in raising capital to cover not only the negative equity but possibly rolling in the debts. However, on a multiple of 3.5 times income, Diane would have a borrowing capacity of £68,600, which does not reach the required level. It seems she will have to tough it out a while longer but should take heart from the rising market which will hopefully continue to negate the deficit.

Measures that Diane must concentrate on now are reducing her debt, particularly her mortgage balance if cashflow allows - rising rents may give some surplus that she could use.

As regards Diane's endowment, she must wait to see if it is on track. If it is not, she will have four options: increase her payments; save extra in an alternative investment vehicle, such as an Isa; put the shortfall amount of the mortgage onto a repayment basis; or surrender the endowment and put the whole mortgage on a repayment basis.

She should bear in mind that if she surrenders, the value is likely to be significantly less than on maturity. But if Diane's main drive is to get rid of the property then there could be grounds for the surrender to reduce the mortgage and speed up progress towards parity with the market value.

David Hollingworth works for London & Country Mortgages

Advice is for guidance only