A number of high street lenders have begun offering mortgages of up to six times borrowers’ incomes in a bid to help more people get on the housing ladder – but experts have warned it could serve as a “gateway” to riskier borrowing.
Last week, NatWest became the latest bank to increase the amount it would lend as a proportion of income. Those earning £75,000 a year, or a couple earning £100,000 combined, can borrow up to 6 times their income for 75 per cent loan to value (LTV) or lower.
Barclays, HSBC and Nationwide have all recently made similar changes to the amounts they will lend at the end of last year, while Santander told The i Paper it is planning to introduce this as an option later this year.
In the past, lending has typically been capped at around four to 4.5 times your income, with some banks offering slightly higher to more desirable applicants.
But recently, lenders have been stretching what they will offer to help more people get onto the housing ladder, because house prices have soared since the pandemic, while mortgage costs have risen due to inflation and rising interest rates.
The Bank of England and regulators have relaxed affordability rules over the past few years that restricted lenders in how much they could offer, following concerns that the rules were unnecessarily stopping people from moving homes.
Brokers say this shift is a “positive move” that will help keep the housing market going, allowing more people to afford to buy a home without having to save up a hefty deposit.
Samuel Mather-Holgate, managing director of Mather and Murray Financial, said: “Lenders’ appetite for risk is returning and it’s good news for homeowners.
“With rates falling, income ratios can be stretched again and NatWest are the latest to improve their offering, which should make it easier for home movers.”
The downsides of borrowing more
However, mortgage broker Lewis Shaw said that letting people borrow six times their income could put people under more financial strain as their mortgage repayments will take up a bigger proportion of their salary.
This could leave them with less flexibility if they face a financial shock like losing their job, getting divorced or becoming ill and can’t work.
“Miss a few payments and you’re not just losing a house; you’re facing bankruptcy. At traditional three to four times multiples, people had wiggle room. At six times, you’re walking a tightrope without a safety net,” he warned.
Richard Davidson, a mortgage adviser at onlinemortgageadvisor.co.uk, added that while this shift could help more people to buy in the short term, he is concerned it could lead to more risky lending down the line.
“Six times income multiples for higher earners have often become a necessity to afford a house in certain areas, like the South East, and due to a lack of available housing, this is likely to become the norm as longer-term mortgages become more common,” he said.
“Lenders will offset risks by using increasingly sophisticated credit scoring and cost-of-living analysis, but there is a risk of this being a gateway to riskier lending after years of caution and restraint since 2008.”
How to get a bigger mortgage
According to mortgage broker John Charcol, lenders will typically only consider offering you six times your annual salary if you meet the following criteria:
- You have a particularly high income or net worth
- Your future income is likely to increase due to your profession – for example, a lawyer or doctor
- You have additional sources of income
- You have a large deposit of 40 per cent or more
You will also typically need an “excellent” credit score with credit reference agencies, and the type of house you want to buy will need to be considered low risk by the lender.
Speak to a mortgage broker or directly to a lender if you are looking to borrow a higher amount, as they should be able to advise you on what you need to qualify.
How to reduce your mortgage costs
If you are struggling with your mortgage repayments, there are several ways you can reduce your mortgage costs.
First, if you are coming up to the end of a fixed deal or you are on a variable rate, check if you could remortgage onto a better rate.
You will usually be able to get a lower rate if you have a lower LTV – the percentage of the property value you borrow vs the amount you own.
Even a small percentage difference in your interest rate can have a big impact on the amount you pay.
If you are struggling with your monthly repayments, you may be able to temporarily move to an interest-only mortgage until your finances are in better shape.
This means you just pay the interest each month. However, make sure you move back to a regular repayment mortgage once you are able to do so.
You could also temporarily extend the term of your mortgage, for example, from 25 to 30 years, as this will spread your repayments over a longer term, lowering the monthly cost.
