Soaring house prices are forcing people to take out ever bigger mortgages, raising fears that homeowners will struggle to make their payments if rates start to soar.
The number of super-sized home loans agreed at six and a half times a borrower’s salary has gone up 138 per cent, with 2,742 taken out in the first six months of this year compared with 1,150 in the same period of 2019. The figures from the Financial Conduct Authority, obtained by Money through a freedom of information request, show a rush to extend borrowing just before inflation began rising fast. The consumer prices index hit a ten-year high, rising 4.2 per cent in the 12 months to October, up from 3.1 per cent in the year to September.
Lending at higher income multiples was a feature of the mortgage market before 2008, when you could also “self-certify” your loan and borrow more than 100 per cent of the purchase price. This meant people not only didn’t need a deposit, they would also get extra cash for furnishings and decorating.
After the financial crash, which was triggered in part by this reckless lending, the Bank of England tightened the mortgage rules.
It said that lending more than 4.5 times a salary was risky and would only allow 15 per cent of a lender’s book to be taken up by these risky loans. This week the Bank said that it was looking into relaxing the rules so that buyers could borrow between five and a half and six times their salary, because of soaring house prices.
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Halifax said that the growth in UK house prices over the past three months was the highest in 15 years, with the average home now worth 8 per cent more than this time last year — an average rise of £20,000.
Most high street lenders will lend more than five times a borrower’s salary only to higher earners or those with large deposits and will not go as high as six times their income.
Homeowners seeking to borrow more should fix their rates for longer. If you fix for five years your income and expenditure is stress-tested at the rate you are borrowing at, so they look at whether you can afford your payments, but if you fix for two years banks add at least an extra two percentage points in case rates go up, which means you can’t borrow as much. Lenders are more relaxed about people borrowing larger sums if they fix for longer because there is less chance that their repayments will shoot up as rates adjust to wobbles in the economy.
Record low rates have also made longer fixes more popular — you could get five-year deals at less than 1 per cent last month, and the affordability of such loans also allows you to borrow more. Banks are putting pressure on the Bank of England to relax the affordability rules and say that they can be trusted to lend responsibly.
Smaller lenders also want an overhaul of ring-fencing rules, which mean that cash from savings and mortgages has to be kept separate from investment and international banking money — this restricts the amount they can lend.
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The banking trade body UK Finance said that affordability checks were “an important protection for homebuyers and lenders, however, it is appropriate that regulators review the requirements periodically”.
In the meantime, banks are finding ways to work around the rules and offer bigger loans.
In April Nationwide began offering five-and-a-half-times salary mortgages to first-time buyers with deposits as low as 10 per cent, but only if they had a good credit record.
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The lender said that all applications would be subject to “robust underwriting checks” looking at all a borrower’s financial commitments. Nationwide’s five-year fixed rate for those with a 10 per cent deposit is 3.19 per cent with a £999 fee.
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In April, Barclays came close to tipping over the 15 per cent “risky” loans limit, and withdrew mortgages it had approved for some customers, including those who had paid for a survey or legal fees and were waiting to exchange contracts on a property sale. Barclays said it had to break the agreements so that it stuck to the regulations.
Mortgage rates are starting to rise. The average two-year fixed rate for those with a 25 per cent deposit was up for the second month in a row in December from 1.3 per cent to 1.52 per cent, although rates for people with smaller deposits fell.
There are concerns that once rates rise further, as the Bank of England puts up the base rate to curb inflation, anyone on a high income multiple loan will be hit hard.
“A whole generation of borrowers are used to very cheap rates and need to prepare for when this comes to an end,” said David Hollingworth from the mortgage broker London & Country. “They should factor in higher costs when their fixed deal ends, particularly if they have high income multiples.”
Anthony Codling from Twindig, a property website, said that anyone who had the chance to remortgage soon should get their paperwork done before Christmas. Most lenders give you six months to lock in a new rate before your deal ends.
