Mortgage borrowing to the power of five

As more and more mortgage lenders appear willing to lend higher income multiples, sometimes up to five times salary or more, to help people get on the housing ladder or trade up, borrowers should beware of overstretching themselves. At a time of rising interest rates, anyone with a variable interest rate mortgage could be in for a nasty shock when their repayments go up.

After Abbey's recent announcement that it will lend five times income to individuals and couples, the Consumer Credit Counselling Service said it was worried about borrowers becoming dangerously overstretched. It warns that some people may feel that borrowing a larger income multiple is the answer to getting on the housing ladder but what happens if your salary doesn't go up as you expect?

Statistics show that more people are failing to make their mortgage repayments and that possession of homes by lenders has been rising. In the first half of this year, possessions were 8,141, the highest figure for five years.

Large income multiples multiply risk

There is always a risk when taking on a mortgage but lenders don't lend us money in a light hearted way. The regulations require them to lend responsibly and after all they want to get their money back. Lenders won't give just anyone a mortgage based a high income multiple. For example, Abbey asks that you have a 25% deposit and earn more than £60,000. It also expects you to have an impeccable credit rating.

Other lenders such as Royal Bank of Scotland and Cheltenham & Gloucester will lend five times your salary. Rather than using income multiples, some lenders base their lending decision on how much you can afford to pay.

With house prices tripling over the past ten years to an average of £169,000 today from £55,000 in 1996, according to Nationwide, and still continuing to rise, unless people can borrow more they either can't get on the housing ladder in the first place or can't afford to trade up.

The Council of Mortgage Lenders reported that first-time buyers are continuing to stretch themselves and that at July 2006 average income multiples reached their high level of 3.24 times income, up from 3.06 times income in July 2005.

Although five times your salary sounds like an awful lot of money to borrow, you have to remember that interest rates are relatively low. Halifax's standard variable rate of 6.75% at the time of writing compares to 15% in the late 1980s and early 1990s.

08 November 2006 © Moneyextra.com

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