Abbey under attack for 'irresponsible' mortgage offer

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The Independent Online

Britain's second biggest mortgage lender has come under attack after announcing that it was prepared to lend home-buyers up to five times their salary.

Abbey said the decision was taken to help borrowers who have been struggling to get on the property ladder because of the relentless rise in house prices. But Citizens Advice sounded alarm at Abbey's move, saying it feared the move could encourage dangerous levels of debt.

Most experts believe mortgage repayments are almost certain to rise next week with the Bank of England expected to raise interest rates to 5 per cent from the current 4.75 per cent.

Moira Haynes, a spokeswoman for Citizens Advice, said of the Abbey loans: "If you do your sums you'll find that borrowing at this rate could mean that up to half your take-home pay is going on mortgage payments. We're concerned that many people will find it hard to keep this up over any length of time."

She said Citizens Advice Bureaux around Britain were already seeing increasing numbers of homebuyers getting behind on mortgage payments. "With a possible interest rate increases on the horizon, people need to think very carefully about whether they can really afford the borrowing they are taking on in the long term," she added.

Nationwide Building Society, which recently relaxed its lending rules and will now let customers borrow 4.25 times their salary, said: "Any customer who makes the decision to borrow five times their income needs to think carefully about the consequences."

Vincent Cable, the Liberal Democrats' Treasury spokesman, described Abbey's decision as alarming. He said: "With interest rates, unemployment and council tax all rising it is likely that these irresponsible lending practices will lead to financial disaster for many people."

The much smaller Northern Rock will also lend at such levels - but requires borrowers to earn at least £100,000.

Abbey will advance five-times income loans to people earning just over half that. Other banks said they would consider such requests only in exceptional circumstances. Most will usually advance no more than 4.5 times income, although even that is higher than the once standard multiple of 3.5 times.

A spokesman for Abbey said: "This product is not going to be available to everybody. People jointly or singly have to earn over £60,000 and they have to be able to afford the repayments. We are doing this because house prices have risen sharply ... and a lot of people have been priced out of the market. This gives people with the financial means the chance to get on to the property ladder."

Mortgage brokers pointed out that repayments have become more affordable thanks to the prolonged period of low interest rates, which have not been in double figures since September 1992.

Abbey's own research shows that 17.3 million Britons are unable to get on the property ladder with 7.4 million citing price as a reason.

So is it a good deal?

Yes: Darren Cook, Head of Mortgage Research, Moneyfacts

Abbey has attracted headlines for increasing its lending criteria to up to five times income, but I don't think it can be accused of being an irresponsible lender.

No lender will lend unless they believe they have a very high probability they'll be repaid. To achieve five times earnings on Abbey's new range, applicants will need over £60k income and a near-perfect credit score. This is unlikely to apply to an indebted first time buyer.

Abbey may have scored something of a PR own goal by revealing that although they have moved from using income multiples to affordability testing for its lending criteria they have disclosed the income multiple on which it is based. Currently half of the top ten mortgage lenders have switched to ability to pay.

Abbey's launch should be seen against concerns about its declining market share. Following the likely Nationwide-Portman merger, it will slip from number two to three in the mortgage lending league.

Abbey is not alone in becoming more innovative. Northern Rock's Together range can also stretch to five times, depending on credit score. National Counties Building Society adopts a sliding scale approach, increasing its multiple the longer the term of the mortgage.

No: Malcolm Hurlston, Head Of Consumer Credit Counselling Service

Life is getting tougher for first-time buyers with house prices racing ahead of incomes. So it is no surprise that the market is looking at new ways of keeping lending approvals up - which in turn underpin house prices. Abbey's extreme mortgage is the latest example.

The experience of CCCS as Britain's leading debt charity shows clearly that it is stretched first-time buyers who are most at risk of running into serious financial difficulty. They have little leeway if anything goes wrong and their incomes no longer match their expectations and commitments. Curiously, many people who come to us believe that because they were offered borrowing, the lender was implicitly telling them that they would be able to repay. This is a dangerous delusion: lenders' calculations are different and generalised.

A mortgage is not a must-have in life and first-time buyers should not be fazed by the promises dangled before them. They should measure the risk with care. We accept the need to innovate but careful lending is not enough. Abbey and other extreme lenders need to work with us to take care of those who have trouble with their borrowing - a problem for which a new home is the trigger.

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