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A BBC investigation broadcast on Wednesday claimed that estate agents encouraged borrowers to apply for mortgages worth up to 10 times their income by exaggerating how much they earn. Borrowers willing to pay such amounts are relatively unusual, but the programme - The Money Programme: Mortgage Madness - has turned the spotlight once again on how much it is possible - and sensible - to borrow.
'Lenders are between a rock and a hard place on this one,' said David Hollingworth of mortgage brokers London & Country Mortgages. On the one hand, industry bodies like the National Association of Estate Agents have criticised mortgage lenders for being over-cautious about income multiples; on the other, bodies like Citizens Advice and the FSA warn about rising consumer debt.
Five to 10 years ago, most lenders gave maximum loans of three times first salary, or two and a half times joint, but the norm is now much higher. Most lenders offer between 3.25 and 3.75 times first income, and brokers can achieve more than that. 'Nowadays it's easy for us to achieve loans for clients of four times one income, or three and a half times joint - that's normal,' says Rob Clifford, CEO of brokers Mortgageforce.
Indeed, many borrowers can access income multiples even higher than that without exaggerating their earnings - some lenders offer up to five times first or four times joint income on selected products. For example, Charcol has a Professional Mortgage, funded by Standard Life Bank, which offers up to five times income to a range of professionals aged 25-35, while Nat West has a Professional Mortgage offering up to five times single salary to certain professionals aged 23 or more. Halifax, Standard Life, Royal Bank of Scotland, the One Account, Nationwide and Intelligent Finance are among those with flexible lending parameters, based on affordability (see below): 'The average is under three times income. The maximum we've got is probably upper four,' says Heather Scott of IF.
Borrowing up to four times income might be considered 'normal' by some in the industry, but it may not be manageable for all borrowers. 'I have no issue with four times first income. I think that's fairly standard,' agrees Hollingworth. 'Many first-time buyers, for instance, are already paying more than that in rent.'
But Philip Robinson, director of the Deposit Takers division at the Financial Services Authority, expressed concern in September about how well lenders' assessment procedures take account of the possible impact of future interest rate changes. 'At the very least, a lender should perform a stress-test of borrowers' capacity to repay at the standard rate, but there is a strong argument for stress-testing all new borrowers against a higher rate that might realistically occur during the first few years of the mortgage. 'After all, a 2 per cent increase in the current level of base rates could translate into a near 50 per cent instalment increase for a number of variable rate, interest-only mortgage borrowers. For people who are already fully borrowed this could be disaster,' he warned.
Some lenders' affordability models already stress-test new borrowers on high income multiples against higher interest rates. It is also common for lenders and mortgage brokers to require or recommend safeguards. 'We do recommend fixed or capped rate deals for borrowers with an extension to over four times income, and we certainly advise them to look at income protection cover as well,' explains Clifford.
In the end, individual borrowers have to apply their own stress-tests. Affordability models are based on borrowers' current circumstances; they do not take account of the potential financial consequences of life changes like having children, relationship breakdown or redundancy, nor of the effect on disposable income of rises in national insurance, council tax or income tax rates. Anyone contemplating going beyond the four times income mark - or even the older norm of three times income - and who thinks their ability to pay their mortgage might be threatened by any of the changes above should think hard. What's affordable in the eyes of the mortgage industry might not be quite so affordable for them.
Looking at the big picture
Lenders such as Intelligent Finance, the Halifax,
Standard Life and Nationwide now base their
lending decisions on affordability calculations.
Instead of using straight income multiples, they
use sophisticated credit-scoring models and credit
records, and look at a much broader picture of
financial commitments that includes car loans,
credit cards, childcare, school fees, maintenance
payments, and whether the mortgage application
comes from single or joint applicants.
Other factors can also influence the decision,
according to Heather Scott of Intelligent Finance:
'Every customer is different, and our lending is
done on a case-by-case approach. We do have
parameters, but there is no such thing as a
maximum. For example, our product is an offset
product, so if someone has, say, ?100,000 in
savings with us, then that would influence how
much we would lend.'
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