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No need to panic about high multiples

There was something of a storm about the news that Abbey was increasing its income multiples and will now consider lending up to 5 x single or joint income. The media seized on this as pushing the boundaries of mortgage borrowing and posed the question as to whether this was irresponsible lending.

This multiple adds up to a hefty level of borrowing but it won’t be readily available to any old borrower who fancies a bigger house. The structure of Abbey’s multiple is based not only on a borrower’s income but crucially also on their credit score. So while a borrower or couple with a combined income of more than 60,000 and achieving a high credit score would be eligible for the 5 x deal, borrowers with a low score and income would qualify for a much more conservative 2.8 x joint income calculation.

Credit scoring brings an element of mystery to proceedings and each lender will have a different model based on their lending experience and attitude towards credit risk. But Abbey indicates factors that will affect credit score, pointing to an established credit record, a low LTV requirement and low debt in other areas. This is not your typical first-time buyer’s situation.

Bank of Ireland recently increased its income multiples and Northern Rock operates a similar multiple structure to Abbey. The matrix approach essentially works in the same way as affordability models in which credit score and income are drivers. This approach provides a tailored decision on an individual’s borrowing capacity.

Just because a lender will offer an enhanced borrowing level does not mean a borrower should take it. An element of responsibility must lie with the borrower.

More people are opting for bankruptcy and individual voluntary arrangements and repossessions are up. It is clear some borrowers are struggling to meet their commitments. When this is coupled with likely base rate rises, it’s clear some borrowers will feel the pressure.

While nobody can afford to be complacent about increasing borrowing levels, we are still in a low interest rate environment and with the base rate at one-third of its level in the late 1980s, we can’t just look at simple salary multiples any more. It is more appropriate to look at the trend in mortgage payment as a proportion of disposable income. This paints a rather prettier picture.

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