Rise of the half million pound mortgage

Affluent homeowners who take advantage of lenders’ very high income multiple offers must take a long hard look into the future to avoid risking it all, advises broker My Mortgage Direct.

“A young professional couple earning a joint income of £100,000 could certainly borrow enough – 500k is not unusual these days – to buy a very desirable property, but should their income drop for any reason things could fall apart very quickly,” said Hearnden.

“Some couples starting a family may take a career break or have to fund child care which could take a large slice of income.

“The relentless rise of property values has led to lenders upping the amount they are prepared to offer to well-off borrowers who can prove they can manage the repayments,” said My Mortgage Direct joint director Cath Hearnden.

“But people’s lives change and they need to fully appreciate the level of financial risk these deals carry.”

As average borrowing for new homeowners reaches a record level of 3.31 times annual income, according to the Council of Mortgage Lenders, lenders face increasing levels of criticism for allowing borrowers to overstretch themselves. In some cases lenders are prepared to advance up to six times annual income.

Northern Rock will lend up to 5.9 times joint income and Abbey, the UK’s second largest lender, is currently offering a five times income deal. Both Halifax and Nationwide have mortgage packages for 4.5 times and 4.25 income respectively.

Lenders have guidelines in place for high income multiple mortgage applicants who are tested for affordability, credit score, borrowing behaviour and even their parents’ incomes.

But whilst these checks ensure that applicants meet the lender’s repayment criteria, they may not take into account the possibility of changes of personal circumstances in the future which make a six times salary mortgage unmanageable.

“Lenders’ checks have become far more sophisticated and thorough but as not all systems are the same it is important to seek the objective overview of an independent broker,” added Hearnden.

Abbey offers up to five times single or joint income to borrowers who can pay a deposit of 25% or more, or who have a household income of at least £60,000. Another big-money deal comes from Darlington Building Society which is offering a six times income fixed rate loan to professional and older borrowers only.

“These deals can be very useful for certain people, but not for all. Just because someone will lend you the money, it doesn’t mean that it’s right for you,” said Hearnden.

My Mortgage Direct urges borrowers to take all eventualities into account when contemplating a high income multiple mortgage and advises them to seek the help of a professional adviser before committing to a deal that could lead to financial meltdown.

“We take a very measured approach and are pragmatic as to the income multiples available. As brokers wanting to secure the best and most competitive deal for our clients, we talk to a wide spectrum of lenders,” said Hearnden.

“Very high income multiple deals are useful vehicles for certain borrowers but for others they can lead down a financial cul-de-sac. The right advice can help better off borrowers to use their wealth wisely.”