This could be the year of a high-volume mortgage – for some UK homebuyers at least – as lenders loosen their portfolio and increase the maximum amounts they are willing to lend.
Mortgage lender Habito recently announced that it will allow some buyers to borrow up to seven times their salary – well above the traditional maximum – in order to help them “secure their dream home sooner.”
In the coming months, a new bank called Perenna is planning to launch mortgages of up to six times the salary, and some experts believe other similar deals will emerge this year.
Those who meet the criteria for these mortgages may be able to purchase a property they may have assumed was out of the price range – perhaps a £200,000 home more than they thought they could afford.
Some would argue that allowing people to borrow more is the only realistic solution to the fact that years of rising property values have left large numbers out of the market priced in. The median home price is now 8.6 times the median income, according to official data.
However, these new deals are only open to some borrowers and come with a lot of downsides – perhaps the biggest being that you may be able to get a much cheaper interest rate if you opt for a standard deal. Just because a bank is willing to “get big” doesn’t necessarily mean it’s a good idea to sign up for a high-volume mortgage.
Banks and building societies look at different aspects of individuals’ finances when determining how much mortgage they think someone can afford. Traditionally the typical maximum amount a person can borrow is between four and five times their salary. This is known as the income multiplier.
In the years after the 2007-2008 financial crisis, rules were tightened to prevent a repeat of the reckless lending that some say was prevalent before the crash. The Bank of England restricted mortgages at more than 4.5 times earnings: Banks could offer higher income multiples but only on a specified percentage of their loans.
In the past year, a number of major lenders raised their cap to 5.5 times the salaries of some borrowers.
Habito, which started as a mortgage broker in 2016 before starting lending in 2019, offers borrowing for up to twice the income seven times the base salary but not for everyone.
Deals are only available to people who take out one of the company’s fixed-for-life loans. Launched last year under the Habito One brand, it allows borrowers to secure their monthly payments at the same level for up to 40 years.
Habito One is open to first time buyers, home movers and resettlement companies in England and Wales. You’ll need a 10% deposit (the company says it hopes to launch a deal for those who can only manage 5% soon) and there’s a hefty £1,995 product fee to pay.
To qualify for the largest loans available, applicants must have one of the following positions: teacher, firefighter, nurse, paramedic, doctor, police officer, accountant, attorney, engineer, attorney, dentist, architect, surveyor or veterinarian. They must also have a base salary of at least £25,000 per year.
Highly paid earners – those with a minimum base salary of £75,000 – and who do not have one of these positions are also eligible.
Single and joint applications will be considered, although if they are a couple, only one application up to seven times the salary will be accepted, and the other up to five times.
At the time of writing, rates for Habito One without early repayment fees start at 2.99% (for 15 years where someone borrows 60% of the property value), and go up to 5.6% (for 40 years where the applicant borrows 90%). Early settlement fee rates – 10 year listing period – are slightly lower: from 2.79% to 5.4%.
Meanwhile, Perina plans to launch its fixed-life mortgage loans in the second half of this year, and says it will allow homebuyers to borrow up to six times their income. It plans to start at a fixed rate for 30 years, and then launch fixes for 40 and 50 years later.
One of the big downsides to this new type of mortgage that offers fixed monthly payments for decades is that most people will be able to get a much lower interest rate if they go for a standard short-term deal like a two or five year fit. With these, when the offer period ends, you can simply move on to another competitive deal.
Elsewhere, rates for first-time buyers looking for a standard two-year fix of 90% loan-to-value currently start at just 1.23%, according to data provider Moneyfacts.
But the lenders behind these fixed-for-life deals say that because your interest rate is guaranteed for the life of the loan, you’re protected from any threat of interest rate fluctuations, and you don’t have to keep paying exorbitant product fees, perhaps every two or three years.
Let’s take a couple who both earn £25,000: if they go into a borrowing limit deal that’s 4.5 times their combined salary, they might be able to buy a £250,000 home. If they go with and qualify for the Habito One deal, they can borrow seven times the salary and five times the other – allowing them to buy a house at a cost of £333,000.
For an individual applicant earning £75,000 whose borrowing has been restricted to 4.5 times the income, they may be able to buy a home for £375,000. With this new deal, they are likely to buy a property worth £560,000 (in this last example, not full salary seven times due to the Habito Rule which states that clients must have a minimum of 10% of cash left in their accounts after all expenses) . (All examples assume a 10% deposit).
What about other lenders?
Many of the big names – including Halifax, HSBC, Santander and Barclays – will now raise up to 5.5 times income for high-income borrowers, and will usually allow those who are accepted access to a full suite of standard mortgage deals.
In Halifax, a 5.5 times maximum salary will apply to those earning more than £75,000 who borrow up to £1m with less than 75% of base salary.
HSBC requires a salary of over £100,000, and the maximum loan amount is 90%.
In Santander, all applicants have a gross income of £100,000 or more, with a maximum loan limit of 75%.
With Barclays, at least one borrower must have £75,000 or more, or high-income applicants must have £100,000 or more, and the maximum loan amount is 85%.
Big loan back
After the 2007-2008 financial crisis, mortgages for first-time buyers in particular were immediately curtailed, but in recent years many lenders have relaxed lending restrictions.
There is more relaxation on the table: the Bank of England has announced that it will consult on scrapping a rule that forces many borrowers to prove they can tolerate a significant rise in interest rates before approving them for a mortgage. Currently, with a typical two- or five-year deal, lenders must stress-test the applicant’s ability to repay the home loan at 3% above the standard variable rate that the borrower may continue at the end of the initial period. This limits the amounts that many people can borrow.
The new breed of long-term fixed-rate mortgages avoids these restrictions because their interest rates are guaranteed for the life of the loan. “There are no interest rate stress tests with long-term fixed-rate products, as borrowers are protected from any long-term rate hikes and will not revert to the lender’s higher base rate,” Perina says.