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.
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