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
Saturday 28 October 2006
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.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Bargain Hunter: Exclusive discount on a SmartGlider - a self-balancing electric scooter
My Tinder date asked for a refund when I declined a second meet up
Number of parents moving to their desired school catchment area is increasing, according to Santander research
Bank-beating exchange rates on your international payments
Be warned of the dirty tricks the bailiffs pull
- 1 More than 11,000 Icelanders offer to house Syrian refugees to help European crisis
- 4 Make your voice heard: Sign The Independent's petition to welcome refugees
- 5 Refugee crisis: Aylan's life was full of fear - in death, he is part of 'humanity washed ashore'
Climate change: 2015 will be the hottest year on record 'by a mile', experts say
Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
iJobs Money & Business
£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...
£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...
Day In a Page
With four bedrooms, this spacious maisonette in a mid-terrace period-style house in Holland Road is well-maintained and offers high ceilings and period features.
The terraces of this two-bedroom penthouse apartment offer panoramic views that stretch over fifty miles from the cliffs of Beachy Head.
In the heart of the coastal village of Mumbles and moments from the pier, this five-bedroom Victorian terrace is set over three floors and retains many original features.
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.