Shabby leads the way on road to ruin

Good old Shabby Abbey. Just when you think things are getting boring in the mortgage market Shabby comes up with another ruse to entice sleepwalking borrowers into its - since the Santander makeover - cheap and nasty high street branches. I much preferred the more attractive and feminine Luqman Arnold vision - pink and purple frontage with free sweeties indoors.

And the latest big idea from Shabby? Lending 5 x salary to buyers struggling to get on the property ladder. “Other lenders are expected to copy the move,” I hear on the radio news. You bet they will if they think they can get away with it.

Will the 5 x salary offer trick more people into borrowing from Shabby rather than another lender? Yes. Will it help more people buy homes? Yes. But it will also push more people into borrowing more than they can afford. And we all know that it only takes a couple of interest rate rises to push most people into a situation where they are in danger of falling into arrears.

Stretching your finances too far is more likely to be the first step on the road to ruin than the best way to climb the first rung of the housing ladder.

Perhaps I am over-reacting. It does happen. Maybe 5 x salary is not such a big leap. Abbey may be the first bank to lend such a high income multiple but it’s only a whisker more than its rivals.

Bank of Ireland Mortgages and Bristol & West recently increased their standard lending multiples from 4 x to 4.5 x earnings and even cautious lenders such as Nationwide and Scottish Widows have raised borrowing levels in recent months.

And the increased lending multiples come with restrictions. With Shabby this includes needing a 25% deposit and an annual income of 50,000 or more. That’s ok then. Only rich punters will lured into overstretching.

But no. That 50,000 income can be made up of the income from two parties. So a couple earning 50,000 between them can borrow 250,000 and pay 1,400 a month in mortgage payments. That sounds like too big a slice of the monthly salary to be comfortable. If the couple split or one gets made redundant the monthly bill will be intolerable.

I hear brokers scream, “But we can sell them mortgage payment protection insurance which will protect them in lean months.” Is it too much of a conspiracy theory to suggest that lenders are increasing income multiples to make MPPI look sensible? Anything is possible in this industry.