Shhhh….‘niche’ lenders offer mortgages up to 6 times borrowers’ income
Mortgage lenders use a calculation known as a Loan-to-Income (LTI) ratio. This refers to how much the borrower is borrowing relative to their annual income. If the LTI was 4, this means the mortgage debt is four times the borrower’s annual income.
Before the credit crunch, 4.5 times was quite a common income multiple used by lenders to offer mortgages. But David Hollingworth, associate director communications at L&C Mortgages, says that at the peak of 2007, affordability models were being used which could have resulted in higher multiples, some reportedly reaching 6 or 7 times.
As the bubble burst, mortgage lenders faced tougher regulation following the Mortgage Market Review (MMR).
Hollingworth says: “MMR stipulated that lenders should be looking not only at the borrower’s income level but also at their ongoing commitments. Although the MMR shifted the focus onto affordability, concerns around an overheating market saw the introduction of additional requirements on lenders. That resulted in the introduction of a limit on the amount of mortgage business on a lender’s book above LTI ratios of 4.5 times.”
He adds: “That brought something of a belt and braces approach to ensure that lending levels didn’t creep higher and result in debt-fuelled house price rises.”
But now it seems the rules are relaxing. Tipton and Coseley Building Society has recently increased the income multiple ratio for purchases and remortgages (up to 85% loan-to-value – LTV). It’s able to offer mortgages up to an income multiple of 6 times.
To qualify, the highest income earner on the application must receive a gross salary of a minimum of £50,000. The rate offered is 2.69% discounted until April 2020, and the maximum loan limit is £450,000. A 0.3% arrangement fee applies.
However, this product isn’t available direct to consumers; instead it’s offered through specialist firms so you’ll need to go through a mortgage broker. Tipton says borrowers with a Help to Buy ISA may be able to use the funds for this product but it “would anticipate that an additional deposit is required”.
Earlier this month, Leeds Building Society also extended its LTI limit from 4.5 times to 4.75 times across its range of mortgage products. It said it allows up to 4.75 times income for home movers and remortgages up to 85% LTV. For mortgages over 85% LTV, it allows up to 4.5 times income and for first-time buyers the LTI ratio is also restricted at 4.5 times. Leeds confirms savers with a Help to Buy ISA can apply. The product is available through all channels, not just through mortgage brokers.
Both Leeds and Tipton and Coseley stress that despite the higher income multiples, applicants will need to undergo strict affordability tests.
Why have lenders increased income multiples?
The increase in LTIs has been prompted by the Bank of England altering a reporting requirement making it easier for lenders to monitor their business and in result, enable them to offer higher LTIs. Lenders have increased flexibility to report LTI ratios quarterly on a rolling 12-month basis, rather than by individual quarter.
Simon Collins, product technical manager at mortgage advice and broker firm John Charcol, says a move from quarterly to annual reporting has made things easier for lenders.
“It used to be the case that 15% of the mortgage lenders’ books per quarter were allowed to be over 4.5 times. But when you think of a hotel rota; it allows you to plan things in advance and it’s the same thing where lenders have a longer period to plan, it’s so much easier. If lenders get to the last quarter and they’re tipping into 4.5 times, it allows them to see where they are and rein it back in if they’re over.”
Why aren’t lenders publicising these deals?
Much of the discreet increase in LTIs stems from the way lenders were viewed post-financial crisis and publicising these deals now could be seen as a return to ‘irresponsible lending’.
Collins said lenders have been quietly increasing LTIs because any publicity surrounding figures over 5 times could be viewed as a “return to the dark days”.
However, Collins said when Newcastle Building Society ran a six times LTI pilot, very few borrowers were granted loans of this size after expenditure was taken into account.
What does this mean for homebuyers?
First-time buyers, the self-employed, those on zero-hour contracts as well as single people, have struggled to get on the property ladder amid rising house prices and slowing wage growth.
The higher LTI ratios offered by these niche lenders may see other banks and building societies review their maximum LTIs but Hollingworth says borrowers should still expect to have to meet affordability requirements.
“Those who sail through the affordability assessment will be pleased to see maximum multiples rise. They may have been held back unnecessarily in the past.”
“Those with high childcare costs, for example, will find their borrowing capacity hit hard. Borrowers need to seek advice and shop around, as all lenders are not the same and it will help them find the right fit for their individual circumstances.”
Dale Jannels, managing director of AToM, one of Tipton’s specialist partners for high income multiples, says lenders should be looking at every way possible to help first-time buyers and those who need increased LTI calculations to get on the property ladder.
“With the average age of first-time buyers increasing to the late 30s and house prices still on the increase in certain areas, if we don’t see other lenders follow suit, we are in danger of the next one or two generations becoming lifetime renters, rather than home owners,” he says.
Earlier this month it was revealed that a petition calling for support of frustrated renters unable to get mortgages was signed by 150,000 people and as a result, MPs will debate whether to consider using rent as mortgage evidence for first-time buyers.
Collins says this, together with higher but sensible income multiples, will be good for the market.
He says: “Someone paying £1,500 rent a month – irrespective of a salary multiple – can afford a mortgage payment of the same amount.”
Collins believes more lenders will follow Tipton’s example. However, he adds: “Don’t expect high income multiples to be well advertised.”