As house prices soar, loans well above the traditional maximum have launched – but there are downsides
This could be the year of the jumbo-sized mortgage – for some UK homebuyers at least – as lenders loosen their purse strings and increase the maximum sums they are willing to offer.
The mortgage lender Habito recently announced that it will let some buyers borrow up to seven times their salary – well above the traditional maximum – in order to help them “secure their dream home sooner”.
Perenna will launch mortgages at six times the salary within the next few months. Experts believe similar deals will emerge in the future.
Those who meet the criteria for these mortgages could be able to buy a property they might have assumed was well out of their price range – perhaps a home costing £200,000 more than they thought they could afford.
These deals are not for all borrowers, and they have many drawbacks.
Some might argue that allowing people more credit is the best solution to the fact many have been priced out by skyrocketing property prices for years. Official data shows that the average home price is 8.6 times the average income.
However, these new deals are only open to certain borrowers and come with plenty of downsides – probably the biggest of which is that you may be able to get a much cheaper interest rate if you go for a standard deal. Just because a bank is prepared to “go large” on its lending doesn’t necessarily mean it is a good idea to sign up for a supersized mortgage.
Banks and building societies look at various aspects of people’s finances when deciding how big a mortgage they think someone can afford to take out. A borrower cannot borrow more than four to five times his or her annual salary. This is the income multiplier.
The average house is now worth 8.6 times what it earns. Photograph: incamera stock/Alamy
These rules were tightened to prevent reckless lending in the future. The Bank of England established limits on mortgages above 4.5 times income. However, banks can offer higher income multiples if they lend a certain percentage.
A number of big lenders raised their cap to 5.5% for certain borrowers last year.
The latest deals
Habito started as a mortgage broker back in 2016. The company expanded into lending in 2019. Although they offer up to seven times your salary in borrowing, this is not the right option for everyone.
The deals are only available to people who take out one of the company’s fixed-for-life mortgages. These deals were made possible by Habito One last year and allow borrowers the ability to lock in their monthly payments for up to 40 years.
Habito One is open to first-time home buyers, home movers, and remortgagers in England and Wales. You will need a 10% deposit (it says it hopes to launch a deal for those who can only manage 5% soon) and there is a chunky £1,995 product fee to pay.
For the most generous loans, applicants must be either a teacher, paramedic, or firefighter and a doctor, nurse, or doctor. They also need to be able to work as a doctor, nurses doctor, officer, surgeon pharmacist, lawyers, engineers, lawyers,s or dentists. They must also earn a minimum basic salary of £25,000 a year.
Higher earners – those on a minimum £75,000 basic salary – who don’t have one of those jobs are also eligible.
Single and joint applications are accepted. However, if the applicant or spouse is married, each will be paid seven times the salary while the other one can accept up to five.
At the time of writing, the Habito One rates without early repayment charges start at 2.99% (for a 15-year term where someone is borrowing 60% of the property’s value), rising to 5.6% (for a 40-year term where the applicant is borrowing 90%). The rates with early repayment charges – the tie-in period is 10 years – are slightly lower: from 2.79% to 5.4%.
Habito One is available for first-time home buyers, home-movers, and remortgagers in England and Wales. Photograph: Geoffrey Swaine/Rex/Shutterstock
Perenna will introduce its fixed-for-life mortgages in the second half of this year. Perenna claims that the mortgage will allow homebuyers up to six times their income. It plans to launch a 30-year fixed-rate mortgage. Then, it will offer 40- and-50-year fixes.
Fixed monthly payments for decades are the downside of this new type of mortgage. Most people will not be eligible to receive a lower interest rate if they choose a standard shorter-term deal like a 2-year or 5-year deal. After the offer period ends, you can switch to a different deal.
According to Moneyfacts data provider Moneyfacts, rates for first-time homeowners looking for a standard 2-year fix up to 90% loan to value starting at just 1.3%
But the lenders behind these fixed-for-life deals say that as your interest rate is guaranteed for the lifetime of your loan you are protected against any threat of fluctuating interest rates, and you won’t have to keep paying expensive product fees, perhaps every two or three years.
Take a couple where both earn £25,000: if they went for a deal where borrowing was capped at 4.5 times their combined salary, they might be able to buy a home worth £250,000. If they went with, and qualified for, the Habito One deal, they could borrow seven times one salary and five times the other – allowing them to buy a home costing £333,000.
For a solo applicant earning £75,000 whose borrowing was capped at 4.5 times income, they might be able to buy a home for £375,000. With this new deal, they could potentially purchase a property worth £560,000 (in this last example, it’s not quite the full seven times salary because of Habito’s rule that customers must have a minimum 10% cash left over in their accounts after all expenditure). All examples assume that a 10% deposit is required.
Barclays and HSBC offer mortgages up to 5.5 times the income of high earners. Photograph by Chris Ratcliffe/Rex Shutterstock
What about other lenders, however?
Several big names – including Halifax, HSBC, Santander, and Barclays – will now go up to 5.5 times income for high-earning borrowers, and will typically let those who are accepted access their entire range of standard mortgage deals.
At Halifax, a maximum of 5.5 times salary will apply to those earning more than £75,000 who are borrowing up to £1m at less than 75% LTV.
HSBC requires a salary of £100,000-plus, and the maximum loan is 90%.
At Santander, it is a combined income for all applicants of £100,000 or more, with a maximum loan of 75%.
With Barclays, at least one borrower must be on £75,000-plus, or the two highest-earning applicants must have a combined income of £100,000 or more, and the maximum loan is 85%.
Large loans are eligible for a return
After the financial crisis in 2007-08, first-time buyers had their mortgages cut. Lenders have since been able to relax lending restrictions.
There are no interest rate stress tests for long-term fixed-rate products
Another relaxation is planned: The Bank of England plans to scrap a rule that required many borrowers to demonstrate their ability to afford a substantial rise in interest rates before they are approved for mortgages. At the moment, with a typical two- or five-year deal, lenders must stress-test an applicant’s ability to repay their home loan at 3% above the standard variable rate that the borrower might go on to at the end of the initial period. This limits the amount of money that is possible to borrow.
The new fixed-rate long-term mortgages eliminate these restrictions. They are guaranteed interest rates for life. Perenna says: “There is no interest rate stress tests with long-term fixed-rate products, as borrowers are protected from any interest rate rises over the long term and won’t revert on to a lender’s higher SVR.”