Is it madness to borrow five times your salary?

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The Independent Online

n many parts of the UK, homes are changing hands for 10 times as much as they did in the mid-Eighties. According to figures calculated by HBOS and the Council of Mortgage Lenders, the average home now costs 6.1 times the average salary. In 1985, it was 3.4 times. So it is hardly surprising that mortgage companies have increased the amount of money they will lend. Abbey, for example, is now lending up to five times a buyer's salary, compared with the traditional three-and-a-half.

Abbey claims the move is designed to help first-time buyers. But with borrowers needing an income of £60,000 or more to borrow five times their salary, any first-time buyers who do benefit are likely to be at the wealthier end of the market. Abbey is not even the most generous lender. Mortgage experts say that some homebuyers might be able to borrow seven or eight times their salaries.

No lender wants to lend money that people cannot afford to repay. The difference between now and the Eighties - or even the mid Nineties - is that the current interest-rate situation is significantly different. The Bank of England base rate is currently 4.75 per cent; even if it rises tomorrow, as some City commentators expect, it will still be a long way below the 15 per cent levels reached in 1991.

In fact, most banks and building societies today look at whether a homebuyer could cope with base rates at 6 per cent before agreeing a loan. Although rates could well rise to that level should inflation continue to increase, no one really expects mortgages to cost 10 per cent or more.

Mortgage lenders are also much better placed to assess what a homebuyer can afford than they were even 10 years ago. Technology, especially the move to electronic credit scoring, enables mortgage companies to build a much more accurate picture of an individual's circumstances.

Abbey's five-times salaries limit is, in fact, a function of the bank's move to using affordability rather than simple income multiples. However, the lender issued data to brokers last week that suggested that an individual or a couple with an income of £60,000 or more could borrow £300,000 - assuming they had a good credit score.

And despite the dire warnings of some commentators, Abbey's offer is not even especially large when set against interest rates and salaries.

"If you calculated mortgage repayments when interest rates could be up to 15 per cent and now, when they could go up to 6 per cent, you can borrow twice as much now for the same monthly repayment as you could then," says Ray Boulger, senior technical manager at brokers John Charcol. "Given that the typical salary multiple then was three-and-a-half times, five times is not even that generous."

Could salary multiples go higher still?

They almost certainly will, if they have not already done so. A number of mainstream lenders such as Bristol & West and Nationwide now offer four-and-a-half times salaries to borrowers. With the mainstream mortgage market appearing to settle at four-and-a-half to five times salaries, specialist lenders may well offer more to selected home buyers.

Brokers point out that lenders are often prepared to be more flexible with borrowers' salary multiples who take out a fixed-rate mortgage, or arrange an interest-only home loan.

Then there are professionals - such as accountants and medics - who can often ask for a higher mortgage, based on their earnings potential. Buyers with additional sources of income, such as bonuses, might also be able to borrow more than five times their base salary. If interest rates stay low and prices continue to rise, more lenders will raise their multiples.

There is, however, a downside. Almost all the mortgage companies who have said they will lend more use affordability calculations. Anyone with a poor credit history, no track record of paying a mortgage and little or no deposit should not hold their breath. "It is borrowers with high incomes that this well help most," says Boulger.

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