The modern method of lending

Peter Mounty’s column often includes a lot of common sense, especially on Home Information Packs. However, some balance is needed in his November 13 column when he described borrowing 5 x joint income as likely to be “financial suicide”. He suggested that “someone with the intellectual capacity of an amoeba would recognise that Abbey’s formula is a recipe for disaster”.

Amoeba are found in freshwater, typically on decaying vegetation and the name comes from the Greek amoibe, meaning change. Therefore amoeba were ideally placed to initiate change from redundant ideas and are proud to have facilitated the much-needed decay of old-fashioned 20th century income multiples.

It was the Newcastle branch of the National Association of Mortgage Amoeba that encouraged Northern Rock to translate their affordability calculation into approximate income multiples of up to 5.9 for those earning at least £100,000 and achieving a high credit score and the Milton Keynes branch is now delighted to have persuaded Abbey to follow suit, albeit with a rather more restricted maximum indicated multiple of five.

The four lenders topping the Council of Mortgage Lenders’ gross lending table last year and at least seven in the top 10 will offer at least 5 x joint income to applicants meeting strict criteria, typically those with a high income, a good credit record or score, few or no other financial commitments and not too many dependents. Most of the major lenders now use affordability to assess how much they will lend. The difference with Abbey and Northern Rock is that they helpfully translate the typical results of an affordability calculation into an income multiple matrix.

However, ultimately the matrix is just an indication of how much they will lend. In some cases it will be more than 5 x income, especially for applicants with six-figure incomes.

The fact is that Abbey is not doing anything new to the mortgage market. It is simply putting an indication of what its affordability calculation translates into in black and white for some typical borrower scenarios. This explains why when its revised mainstream criteria was emailed to brokers it became a big story in the national media but received no comment from brokers. Indeed I thought the most interesting amendment to the criteria was its improved fast-track policy.

As an example of just how earth shattering the news that Abbey is now lending 5 x income really is I quote the following extract from Paul Lewis’ introduction to Money Box Live on BBC Radio 4 more than five years ago on June 25 2001. “Some people are being offered five times their salary,” he said at the time.

Of course many borrowers will not be able to afford to borrow 5 x their income but a sizable minority can, especially over longer terms. Many parents scrimp so that they can afford to send their children to private school. Why should borrowers who prioritise a nice home, and hence their mortgage payments over other ways of spending their income, be denied a mortgage they can afford?