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Brokers defend higher income multiples for mortgage borrowing

Brokers have spoken out in defence of mortgage products based on higher than average income multiples following criticism for the deals in the national press.

This week, Darlington Building Society launched a six-times salary mortgage for professionals in certain professions, including accounting, law and medicine. This is the largest loan-to-income ratio mortgage product currently on the market.

A number of national newspaper reports have said the deals could put consumers at risk of defaulting, with one reporting that the products could create a ‘mortgage time bomb’.

However, brokers deny that this is the case and say that the deals will only be available to those who can prove they can afford them.

Coreco director Andrew Montlake says: “There is a wealth of difference between the extended income multiple models we see now and the craziness of the past. I understand that on the face of it, lending six times income may give cause for concern, but this is now all governed by overall affordability.”

He says that stress testing that a client can afford the loan, not just now but in the future, based on an increase in rates of circa 3 per cent gives a lot more comfort.

“Also, this is not something that is readily available to everyone like it was before. This is for professionals who have a proven expectation that they will be on an increasing salary projection over the next few years. It is a niche product aimed at the right people, not a mass market product carelessly being marketed as the norm.

“Whilst we cannot predict the future, we can feel somewhat more confident that these types of products are carefully underwritten and do play an important part in helping to move the market and get people onto the property ladder,” says Montlake.

Meanwhile, managing director Richard Merrett says that there are instances where applicants have good incomes and low outgoings and can demonstrate that higher mortgage repayments will be affordable and sustainable.

“The basic cost of living is the same for everyone. A pint of milk, for example, costs the same whether you earn £20,000 or £100,000. So, for higher earners, lenders can make a judgement that they will have a larger proportion of disposal income to spend on mortgage repayments once they have paid for essential items,” says Merrett.

“Different lenders will have different ways of calculating affordability, but all will have systems and controls in place to ensure that lending is affordable and sustainable. This was a key element of the Mortgage Market Review and it is a significant differentiator between today’s market and the lending environment prior to the financial crisis.

“Used appropriately, with the right systems and controls, lenders are able to address the affordability issue, which is a major hurdle for many homebuyers and in doing so they can deliver good customer outcomes.”

He adds that in the right circumstances, for the right borrowers, higher income multiples can provide customers with more choice and opportunity to take a mortgage that matches their needs, and that this should be encouraged.

John Charcol product technical manager Nick Morrey says that regulations stipulate that up to 15 per cent of lender business can be carried out on different income multiples.

“There is nothing to stop a lender offering up to 10 times income if they choose to, so long as stress tests and affordability checks are carried out,” says Morrey.

Darlington Building Society director of products and marketing Caroline Darnbrook says the lender individually assesses each mortgage it provides, “meaning that we can undertake appropriate due diligence and get the clearest possible picture of a borrower.”

“We are then able to ensure that we lend responsibly and in line with the specific circumstances of an individual.  Every mortgage that we write is considered with five pillars of lending in mind and the combined risk of these is taken to provide an overall picture. The five pillars are loan-to-value, loan-to-income, credit history, affordability and security.”

Darnbrook adds that the new professionals mortgage has been designed to support the needs of newly qualified professionals who are looking to get onto the housing ladder.

“In this case, our assessment takes into consideration the understanding that the salaries of these individuals are likely to increase significantly in the future and therefore we are able to consider current affordability and also affordability in the future.

“This means we can move the borrower onto a slightly higher loan-to-income ratio, while maintaining a strong credit assessment,” she says.


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