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Do you think it is irresponsible to lend first-time buyers 5 x income?

To label Abbey’s 5 x product irresponsible is unfair as it is unlikely to put first-time buyers at risk, say our experts

Andy Pratt chief operating officer at Alexander Hall
Abbey’s decision to lend up to 5 x joint income was a brave one as there were bound to be media cries of irresponsible lending.

But income multiples of 5 x or more are already available. Lenders such as Halifax and Alliance & Leicester have launched affordability calculators this year which support high multiples of lending if the prospective borrowers have professional jobs, a healthy deposit and a clean credit history.

Other lenders such as Scottish Widows Bank also provide similar income stretches for young professionals such as doctors or solicitors, where income is expected to increase substantially over the next three to five years.

The key to this type of lending is the level of deposit involved. The standard industry benchmark for high income multiples is a 25% deposit, necessary to balance the risk to the lender. If the lender can be sure it can recover its money if it needs to repossess and then resell the house, the risk is considered low.

If any customer – not just a first-time buyer – has a 25% deposit they can already choose from some excellent mortgage products. Abbey has added to this product variety and is providing even more customer choice.

Abbey’s decision should be applauded for its honesty but it is not headline news. The only surprise is that Abbey has not launched an affordability calculator. I’m sure that this is in development for 2007. The chance of a first-time buyer getting a loan of more than 5 x income from Abbey or other lenders in the first-time buyer market is low. An affordability calculator to determine how much a first-time buyer can lend is safer because their spending history while they have been renting can be assessed against their projected mortgage payments.

Andrew Montlakee is partner at Cobalt Capital
I can’t understand why such a fuss has been made about Abbey’s decision to lend at this level. For borrowers with a good credit rating, a large deposit and income above 50,000, a handful of lenders have been able to lend 5 x income for quite some time. In fact, since many lenders changed to affordability-based underwriting, this level of lending is not spectacular.

The questions are who is the product aimed at and who will be selling it? Your average first-time buyer, who Abbey claims this is aimed at, rarely has a 25% deposit. Therefore the main beneficiaries of the Abbey loan are likely to be upwardly mobile second-time buyers rather than people struggling to get onto the housing ladder.

The key here is the 75% LTV barrier. At this level, lenders have an assumed low risk proposition on their hands. The risk that the lender will not make its money back if the property is repossessed is much diminished, even in a falling market. Therefore a lender can afford to be more flexible and generous on income calculations.

A broker or direct adviser advising on such a product has a responsibility. For borrowers who are already at the top of their comfort zone when it comes to making payments and whose income is not going to increase greatly over the next few years, any increase in interest rates would be disastrous.

As for this deal being labelled irresponsible lending, that is grossly unfair. At 75% it is unlikely borrowers will dip into negative equity, and with a minimum income hurdle most borrowers are likely to be in more stable employment.

In essence, while this product might be a bit of a marketing gimmick by Abbey, it is a sensible product from a solid lender, and one that takes account of today’s economic reality.


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