No time to be overstretched, with interest rates set to rise

Mortgages may cost less than 10 years ago, but repayments are set to rise further, warns James Daley

It's not always easy being a mortgage lender. Lend too much and you are criticised as irresponsible when home-owners can't keep up with repayments. Tighten lending controls, and borrowers claim that you're making it too difficult to get on the housing ladder. So into which category does this week's move by Bank of Ireland and its subsidiary Bristol & West fall?

The group has increased the standard amounts it will lend as a multiple of borrowers' salaries. Single applicants will now be able to borrow 4.5 times their salary, up from a multiple of four, while joint applicants will be able to borrow four times their combined income, compared to 3.25 times before. And on the group's five-year fixed-rate products, these multiples will rise to five and 4.5 times respectively.

Bank of Ireland says the move simply brings it into line with other lenders. In fact, the change in policy puts it at the most generous end of the range of providers who still use salary multiples to determine how much they are prepared to lend.

Several lenders already offer much larger loans to certain clients because their calculations are based on affordability criteria rather than a crude salary multiple. But the timing of Bank of Ireland's move has raised eyebrows. The Bank of England raised interest rates by 0.25 per cent in August and is expected to do so again next month. A third rise in February is also possible.

Mortgage lenders all use slightly different criteria to process applications and refuse to disclose exactly how they come to a decision. Affordability calculations, for example, are based on your income and outgoings each month, as well as taking into account your credit score. Lenders also consider how much you want to borrow in relation to the value of the property.

Teresa Fritz, a senior policy researcher for Which?, the consumer group, says that all responsible lenders should now be carrying out this sort of affordability check, even if they also use salary multiples as a guideline.

"Our only concern about high multiple lending is that the adviser does their job properly and thoroughly checks the borrower's affordability," she says. "Unfortunately, when we go mystery shopping, we find that advisers don't always do what they're supposed to."

Mortgage providers' increasing flexibility is mainly a response to rising house prices. Most first-time buyers would no longer be able to get on the ladder at all if banks and building societies were still only offering to lend the three-times-salary multiple typical in the 1980s. A survey from the London Housing Federation this week revealed that the average property in the capital is now worth 8.8 times the average salary.

Equally, though, lenders' increased flexibility has played a part in this monumental growth, as Nick Gardner of independent adviser Chase de Vere points out. "If lenders had not become more generous during the past few years, many more people would have been priced out of the property market and prices may well have crashed," he says. "So, lenders have become more generous to keep the market moving - helped by a climate of low interest rates that has made mortgages more affordable."

Gardner adds that, with average interest rates today about a third of what borrowers had to pay at the end of the 1980s, it is not unreasonable for lenders to advance much larger sums.

Melanie Bien, associate director at independent mortgage broker Savills Private Finance, concedes that more generous lending criteria mean that it is still possible to borrow more than you can realistically afford. She advises borrowers to think carefully about how they would manage if rates went up by more than expected - say 0.5 to 1 per cent.

"The important factor is to ensure you don't overstretch yourself," she says. "Just because a lender is prepared to advance you a certain-sized mortgage doesn't mean you should necessarily borrow that much."

Fritz advises those who are looking to borrow higher amounts to seek professional advice. To find a local broker or IFA, visit www.impartial.co.uk.

Are fixed rates the way to cope with rising mortgage costs?

* With interest rates widely expected to rise by another 0.25 per cent to 5 per cent on 9 November, the best fixed rates on the market have been disappearing over the past few weeks. Alliance & Leicester, Halifax and Abbey have all repriced or pulled their two-year fixed-rate deals this week.

* However, David Hollingworth of independent mortgage broker London & Country says that intense competition in the market has ensured that there are still some good fixed-rate deals to be found.

* Nationwide offers the lowest two-year fix with a rate of 4.47 per cent. However, it comes with a very high arrangement fee of £1,499. The next best two-year rate is Britannia's 4.64 per cent, with a more manageable fee of £499. On five-year deals, Portman offers a rate of 4.99 per cent, also for a fee of £499.

* Hollingworth says fixed rates have been increasingly popular in recent weeks, as borrowers have looked for some certainty ahead of predicted rate rises.

* He points out that the best variable rate deals on the market are currently not so much better than the best fixed rates. Bank of Scotland offers a two-year base rate tracker mortgage, currently priced at 4.29 per cent, with a fee of £699. However, this will automatically rise if rates do go up next month.

News
Young Winstone: His ‘tough-guy’ image is a misconception
people
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
Sport
Adnan Januzaj and Gareth Bale
footballManchester United set to loan out Januzaj to make room for Bale - if a move for the Welshman firms up
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
filmIdris Elba responds to James Bond rumours on Twitter
PROMOTED VIDEO
News
Hackers revealed Oscar-winning actress Lawrence was paid less than her male co-stars in American Hustle
people
Arts and Entertainment
Ellie Levenson’s The Election book demystifies politics for children
bookNew children's book primes the next generation for politics
Sport
Wayne Rooney warms up ahead of the English Premier League football match between Tottenham Hotspur and Manchester United at White Hart Lane
football
News
Outspoken: Alexander Fury, John Rentoul, Ellen E Jones and Katy Guest
newsFrom the Scottish referendum to the Ice Bucket Challenge, our writers voice their opinions
Arts and Entertainment
Lena Headey as Cersei Lannister in Game of Thrones
film
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
News
Nigel Farage celebrates with a pint after early local election results in the Hoy and Helmet pub in South Benfleet in Essex
peopleHe has shaped British politics 'for good or ill'
Voices
Strictly Come Dancing was watched by 6.9m viewers
voicesIt has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
News
Danielle George is both science professor and presenter
people
News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

    Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    Day In a Page

    War with Isis: The West needs more than a White Knight

    The West needs more than a White Knight

    Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
    Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

    'The day I was shot by the Taliban'

    Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
    Revealed: the best and worst airlines for delays

    Revealed: the best and worst airlines for delays

    Many flyers are failing to claim compensation to which they are entitled, a new survey has found
    The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

    The stories that defined 2014

    From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
    Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

    Disaster looming? Now you know where to head...

    Which British city has become the first to be awarded special 'resilience' status by the UN?
    Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

    Finally, a diet that works

    Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
    Say it with... lyrics: The power of song was never greater, according to our internet searches

    Say it with... lyrics

    The power of song was never greater, according to our internet searches
    Professor Danielle George: On a mission to bring back the art of 'thinkering'

    The joys of 'thinkering'

    Professor Danielle George on why we have to nurture tomorrow's scientists today
    Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

    Monique Roffey interview

    The author on father figures, the nation's narcissism and New Year reflections
    Introducing my anti-heroes of 2014

    Introducing my anti-heroes of 2014

    Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
    DJ Taylor: Good taste? It's all a matter of timing...

    Good taste? It's all a matter of timing...

    It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
    Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

    How we met

    Olivia Jacobs and Ben Caplan
    Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

    Bill Granger's healthy breakfasts

    Our chef's healthy recipes are perfect if you've overindulged during the festive season
    Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

    Who does your club need in the transfer window?

    Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
    The Last Word: From aliens at FA to yak’s milk in the Tour, here’s to 2015

    Michael Calvin's Last Word

    From aliens at FA to yak’s milk in the Tour, here’s to 2015