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”.
In the coming months a new lender called Perenna plans to launch mortgages of up to six times salary, and some experts believe other similar deals will emerge this year.
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 new deals are only open to certain borrowers and come with plenty of downsides
Some might argue that letting people borrow more is the only realistic answer to the fact that years of soaring property values have left large numbers priced out of the market. The average price of a home is now 8.6 times average earnings, according to official data.
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.
The basics
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. Traditionally the typical maximum for how much someone can borrow is between four and five times their salary. This is known as the income multiple.
View image in fullscreenThe average price of a home is now 8.6 times average earnings. Photograph: incamerastock/Alamy
In the years after the financial crisis of 2007-08, rules were tightened up to prevent a repeat of the reckless lending that some say was rife prior to the crash. The Bank of England imposed limits on mortgages of more than 4.5 times earnings: banks can offer higher income multiples but only on a set proportion of their lending.
Last year a number of big lenders lifted their caps to 5.5 times salary for certain borrowers.
The new deals
Habito, which started as a mortgage broker in 2016 before launching into lending in 2019, is offering borrowing of up to an income multiple of seven times basic salary but not to everyone.
The deals are only available to people who take out one of the company’s fixed-for-life mortgages. Launched last year under the Habito One brand, these let borrowers lock their monthly repayments at the same level for up to 40 years.
Habito One is open to first-time 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.
To qualify for the biggest loans available, applicants need to have one of the following jobs: teacher, firefighter, nurse, paramedic, doctor, police officer, accountant, barrister, engineer, lawyer, dentist, architect, surveyor or vet. 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 will be considered, although if it is a couple, only one will be accepted for up to seven times salary, with the other at up to five times.
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%.
View image in fullscreenHabito One is open to first-time buyers, home movers and remortgagers in England and Wales. Photograph: Geoffrey Swaine/Rex/Shutterstock
Perenna, meanwhile, plans to launch its fixed-for-life mortgages in the second half of this year, and says it will be letting homebuyers borrow up to six times their income. It intends to start with a 30-year fixed-rate, then launch 40- and 50-year fixes later.
One of the big downsides of this new breed of mortgage offering 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 shorter-term deal such as a two- or five-year fix. With these, when the offer period ends, you simply move to another competitive deal.
Elsewhere, rates for first-time buyers looking for a standard two-year fix up to 90% loan-to-value currently start at only 1.23%, according to the data provider Moneyfacts.
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.
The maths
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 of the examples assume a 10% deposit).
View image in fullscreenBarclays and HSBC are among the big names that will go up to 5.5 times income for high-earning borrowers wanting a mortgage. Photograph: Chris Ratcliffe/Rex Shutterstock
What about other lenders?
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%.
The return of big loans
After the 2007-08 financial crisis, mortgages to first-time buyers in particular were immediately slashed but in recent years many lenders have eased lending restrictions.
There are no interest rate stress tests with long-term fixed-rate productsPerenna
A further relaxation is on the cards: the Bank of England has announced it will consult on scrapping a rule that forces many borrowers to prove they could afford a big rise in interest rates before they can be approved for a mortgage. 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 amounts many people are able to borrow.
The new breed of long-term fixed-rate mortgages avoid these restrictions because their interest rates are guaranteed for the lifetime of the loan. Perenna says: “There are 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.”
