Building societies defend products offering higher income multiples after regulator delivers warning shot
The striking language chosen by Prudential Regulation Authority chief executive Sam Woods to address building society bosses late last month may have prompted some difficult conversations in boardrooms around the country over the week that followed.
During the months ahead, the market will learn whether his warning at the Building Societies Association conference in May will result in a tightening of criteria, or simply put the brakes on any further developments.
He raised concerns that heightened competitive pressure on rates had prompted “a material move up the risk curve” by some lenders, in order to maintain their margins.
Woods said: “You can see this absolutely clearly in several ways: a dramatic fall in spreads demanded over the risk-free rate; a marked shift in the high loan-to-value share of new lending by building societies; and a significant increase in firms’ appetite for higher LTV and higher loan-to-income lending.”
He acknowledged that lenders may already be carefully managing these risks and that they should also be captured by the regulator’s capital framework. But he added: “We should be watching them like a hawk.”
A small number of lenders are now offering mortgages up to 5.5 and even six times income in certain circumstances. Among these are Kensington Mortgages, Darlington Building Society and Tipton & Coseley, which offer up to six times income. Clydesdale Bank and Loughborough offer up to 5.5 times.
Woods did not target his comments at particular lenders, nor did he define a ceiling on what maximum income multiples or LTVs the PRA deems acceptable. But the rules already prevent lenders from allowing any more than 15 per cent of new mortgages to reach multiples of over 4.5 times income. The Association of Mortgage Intermediaries made similar observations in its quarterly economic bulletin earlier this year.
Ami chief executive Robert Sinclair says: “You can move to higher income multiples if you are doing it at a decent LTV and you have good affordability checks going on underneath that. None of this is one-dimensional.”
He warns that, in the past, problems arose through the layering of multiple types of risk at the same time. “All the regulator is trying to do is send a warning shot. If you are going to stretch the boundaries, only do so in one dimension, not in all dimensions at the same time,” he adds.
“It is clear to most brokers that lenders are widening their stretch across a range of boundaries. The PRA would not be giving that warning unless there was some evidence of concern.”
Moneyfacts recently reported that the average two-year fixed-rate at 95 per cent LTV has fallen from 5.33 per cent to 3.25 per cent over the past five years – a drop of 208 basis points. Meanwhile, at 60 per cent LTV, average two-year rates have fallen from 2.96 per cent to 1.9 per cent, or a reduction of just 106 basis points.
Sinclair points out that the pricing difference between 95 and 75 per cent LTV mortgages is now extremely narrow, as is the gap between two- and five-year fixed rates. “That isn’t logical to a regulator looking at pricing to risk, both in terms of LTV and the liquidity risk of having the money tied up for five years,” he warns.
But John Charcol senior technical manager Ray Boulger argues that low interest rates mean higher income multiples are more affordable than they have been in the past.
He says: “Six times income at today’s interest rates requires lower monthly payments than five times income did prior to the credit crunch.
“The whole FCA strategy since then has been that mortgages are assessed on an affordability basis, and I actually think it is regressive for the PRA to be talking about income multiples.”
Boulger argues the risk that these higher income multiple mortgages might become unaffordable as rates rise is balanced by stringent stress tests requiring lenders to check such borrowers could still manage repayments at their revert-to rate, plus 3 per cent.
Lenders offering mortgages above five times income argue careful underwriting, stress-testing and additional criteria for these types of loans mean the extra risks are fully offset. They each say that they assess affordability in detail and in line with all the regulatory requirements.
Kensington Mortgages new business director Craig McKinlay says: “For young professionals whose current earnings are not reflective of their future earnings potential, and also for some high earners, Kensington is willing, under certain circumstances, to consider higher income multiples on a mortgage application, up to a maximum of six times earnings.”
The only professionals considered for this LTI are solicitors, barristers, doctors, dentists, actuaries, chartered accountants and commercial pilots, the lender has confirmed.
McKinlay adds: “Using a mix of market-leading predictive data and judgement of experienced underwriters, we are able to examine risks that fall outside the usual parameters of the big banks, and can hence offer mortgages to a broader range of borrowers; but in each case only following detailed and individualised analysis of their ability to take on new debt. We do not lend beyond 90 per cent LTV and the maximum loan is £500,000 on our young professionals range.”
Darlington Building Society chief risk officer Christopher Hunter also says the lender describes a rigorous approach when lending at six times income to those in a similar range of professions.
He says: “During the mortgage application process, we undertake a robust assessment of affordability, which considers if there will be, or are likely to be, any future changes to the income and expenditure of the borrower during the term of the mortgage.
“The professionals mortgage is aimed at newly qualified individuals in a limited number of professions, where their income is expected to significantly increase over a period of time.
“The society lends responsibly and each and every mortgage is affordable now on the applicant’s current income.”
The range is available at up to 90 per cent LTV in order to help first-time buyers but, in London, this is limited to 80 per cent LTV and for flats is restricted to 60 per cent LTV.
At Tipton & Coseley, director of sales and marketing Cammy Amaira says that manual underwriting allows the building society to offer a small amount of lending at up to six times income, with LTVs of up to 85 per cent. He says: “We recognise that there is an increased risk for both the society and the customer, so each case is carefully reviewed.
“There is often a reason why a customer requires this higher income multiple to be considered and it can be for a short-term reason. For example, funds are being released from another asset but not in time for the house purchase.”
Amaira says that, typically, only high earners with low monthly commitments will meet its strict affordability tests and the number of mortgages agreed at this LTI is small.
Other lenders that will go up to 5.5 times income in certain circumstances include Clydesdale Bank, part of CYBG, and Loughborough Building Society. A spokeswoman for Clydesdale says: “Mortgages up to 5.5 times salary are highly targeted and available for a very specific group of newly qualified professionals.
“As with all mortgage applications, our lending decisions are based on a full income and expenditure assessment, to assess individual affordability, ensuring that we continue to lend responsibly.”
These professionals must have fully qualified within the past five years as accountants, architects, barristers, chartered surveyors, dentists, medical doctors, pharmacists, pilots, solicitors or vets, with an income of at least £40,000, and can borrow up to a maximum of 95 per cent LTV.
Loughborough stated that it would consider lending up to 5.5 times income for borrowers who earn at least £50,000, regardless of profession, specifically on a discounted two-year deal at 2.45 per cent, which it recently launched. The maximum LTV is 85 per cent.
A spokeswoman says: “We are aware of Sam Woods’s speech and absolutely support the position of the PRA. The Loughborough is a responsible lender and, in line with the Mortgage Credit Directive and other regulatory requirements, affordability is the overriding decision on whether or not we lend.
“We have not changed our general level of income multiples. The change we announced last month is only available with one product.”