If buying your dream home seems a bit of a stretch, it may help to know that a small number of lenders are now agreeing to give borrowers a mortgage of 5.5 times their income.
But before you get too excited about being able to get a really good home loan, it’s important to understand the terms and conditions as these offers are only for high income earners.
Mortgages of this size also aren’t available at a particularly high loan-to-value ratio (LTV), which means you’ll need a large deposit to qualify.
Here we take a closer look.
What is changing?
Typically, banks and building societies will lend up to four and a half times your total income, combined with that of anyone you buy with.
According to the Which? Consumer group, if your total household income is £ 60,000 ($ 80,975) per year, you could be offered up to £ 270,000.
However, in recent weeks we’ve seen some movement on this.
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Halifax recently changed some of the Loan-Income Limits (ILTs) applied to its affordability. For loans up to £ 1million, up to 75% LTV (meaning a minimum deposit of 25%), the maximum LTI drops from five times income to 5.5.
Elsewhere, HSBC (HSBA.L) also now allows applicants to borrow 5.5 times their salary.
What’s the catch?
While this may sound like a very positive thing, you will only be eligible for these more generous Halifax offers if you have an income of over £ 75,000 per year.
HSBC also reserves its large mortgage loans for high net worth buyers.
Andrew Montlake, Mortgage Broker Coreco, said: “It is true that some lenders reserve higher income multiples for borrowers with higher income. Lenders find that these people are more likely to face changes in interest rates and also have a greater propensity to repay the loan faster. They are therefore viewed as a lower risk overall.
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Mark Harris of SPF Private Clients, another mortgage broker, added: “Higher LTI ratios are also possible for those working in occupations where their income is expected to increase significantly as they grow older. they advance in their careers, especially in professional roles such as doctors and accountants. “
Is there a danger of a return to irresponsible lending practices?
In the past, lenders offering large loan deals have been criticized for their irresponsible lending practices.
But mortgage brokers say they’re reasonably relaxed about changes in income multiples and aren’t concerned about the return of lenders to the free and easy loans of the 2000s.
Montlake said: “The reality is that all lenders will be looking at an affordability basis, rather than just multiples of income, with the five or 5.5 times the salary listed being the absolute maximums – rather than an automatic donation. This is also stress tested against potential interest rate hikes for anyone who does not take a fixed rate deal of five years or more. “
This is a view shared by Harris. He said: “It should be remembered that these LTI ceilings are theoretical, with each borrower being assessed on their affordability, taking into account income as well as expenses. This is then put through a stress test to make sure the loan is responsible. In other words, the lender takes into account that the borrower can afford an increase in interest rates and does not fully extend to the original mortgage rate.
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Additionally, lenders also limit higher LTIs to those with large deposits. In doing so, banks take additional steps to reduce risk.
Lenders begin to relax their lending criteria
The good news is that as the UK rolls out of initial pandemic restrictions, lenders are feeling more confident that they will return to lending criteria they once had.
Aaron Strutt of Trinity Financial said, “More and more lenders are offering mortgages more than five times the salary to help borrowers get enough mortgages to buy the properties they want.
This is part of a larger trend of lenders starting to relax their lending rules a bit.
Montlake said: “In general, all borrowers now find that they have more choice – as well as the ability to borrow a little more – while being valued in a reasonable and prudent manner. This is a positive point for those looking to apply for a mortgage.