Oversized Mortgages: Can You Get One & What Are The Dangers? | Mortgages

This could be the year of the giant mortgage – for some UK buyers at least – as lenders loosen their purse strings and increase the maximum amounts they are willing to offer.

Mortgage lender Habito recently announced that it will let some buyers borrow up to seven times their salary – well above the traditional maximum – to help them “secure their dream home sooner.”

In the coming months, a new lender called Perenna plans to launch mortgages of up to six times the salary, and some experts believe more similar deals will emerge this year.

Those who qualify for these mortgages could buy a property they thought was well outside their price bracket – perhaps a house costing £ 200,000 more than they thought they could afford.

Some might argue that letting people borrow more is the only realistic answer to the fact that years of soaring property values ​​have left many prices off the market. The average price of a house is now 8.6 times the average income, according to official data.

However, these new offers are only open to certain borrowers and have a number of drawbacks, probably the most important of which is that you may be able to get a much cheaper interest rate if you go for a standard offer. Just because a bank is prepared to invest heavily in its loans doesn’t mean it’s necessarily a good idea to take out an oversized mortgage.

The basics

Banks and mortgage lenders look at various aspects of people’s finances when deciding how much mortgage they think a person can afford. Traditionally, the maximum amount a person can borrow is between four and five times their salary. This is called the income multiple.

In the years following the 2007-08 financial crisis, the rules were tightened to prevent a repeat of reckless lending that some argued were commonplace before the crash. The Bank of England has placed limits on mortgages over 4.5 times earnings: banks can offer higher income multiples, but only on a set proportion of their loans.

Last year, a number of major lenders raised their caps to 5.5 times the salary for some borrowers.

New offers

Habito, who started as a mortgage broker in 2016 before moving into lending in 2019, offers borrowing up to an income multiple of seven times base salary, but not to everyone.

The offers are only available to people who take out one of the company’s fixed life mortgages. Launched last year under the Habito One brand, they allow borrowers to lock in their monthly payments at the same level for up to 40 years.

Habito One is open to first-time buyers, movers and remortgagers in England and Wales. You’ll need a 10% down payment (he says he hopes to kick off a deal for those who can only manage 5% soon) and there is a hefty product fee of £ 1,995 to pay.

To qualify for the largest loans available, applicants must have one of the following jobs: teacher, firefighter, nurse, paramedic, doctor, police officer, accountant, lawyer, engineer, lawyer, dentist, architect, surveyor or veterinarian. They must also earn a minimum base salary of £ 25,000 per year.

High income earners – those with a minimum base salary of £ 75,000 – who do not have one of these jobs are also eligible.

Both individual and joint applications will be considered, although if it is a couple, only one will be accepted up to seven times the salary, the other up to five times.

At the time of writing this report, Habito One no prepayment charge rates start at 2.99% (for a 15-year term where someone borrows 60% of the property’s value), rising to 5. 6% (for a period of 40 years where the applicant borrows at 90%). The rates with prepayment charges – the peg period is 10 years – are slightly lower: from 2.79% to 5.4%.

Perenna, meanwhile, plans to launch her lifetime mortgages in the second half of this year and says she will allow homebuyers to borrow up to six times their income. He intends to start with a 30-year fixed rate and then roll out 40 and 50-year fixes later.

One of the big drawbacks of this new generation of mortgages offering fixed monthly payments for decades is that most people will be able to get a much lower interest rate if they go for a shorter term standard deal. like a two or five year contract. to fix. With these, at the end of the offer period, you simply switch to another competitive offer.

Elsewhere, rates for first-time buyers looking for a standard two-year solution up to 90% of the loan-to-value ratio currently start at just 1.23%, according to data provider Moneyfacts.

But the lenders behind these fixed life agreements claim that because your interest rate is guaranteed for the life of your loan, you are protected against any threat of interest rate fluctuations and you will not have keep paying expensive product fees, maybe every two or three years.

Math

Take a couple where both earn £ 25,000: If they went for a deal where the loan was capped at 4.5 times their combined salary, they might be able to buy a house worth £ 250,000. If they accepted and qualified for the Habito One deal, they could borrow seven times one paycheck and five times the other, which would allow them to buy a home for £ 333,000.

For a solo seeker earning £ 75,000 whose loan was capped at 4.5 times income, he might be able to buy a house for £ 375,000. With this new deal, they could potentially buy a property worth £ 560,000 (in this latest example, it’s not quite seven times the total salary due to Habito’s rule that clients must have at least 10% cash in their accounts after all expenses). (All examples assume a 10% deposit).

What about other lenders?

Several big names – including Halifax, HSBC, Santander and Barclays – will now reach up to 5.5 times the incomes of high-income borrowers, and generally allow those who are accepted to access their full range of standard mortgage deals. .

In Halifax, a maximum of 5.5 times the salary will apply to those earning over £ 75,000 who borrow up to £ 1million at less than 75% LTV.

HSBC requires a salary of £ 100,000 or more, and the maximum loan is 90%.

At Santander, this is a combined income for all applicants of £ 100,000 or more, with a maximum loan of 75%.

With Barclays, at least one borrower must have £ 75,000 and over, or the top two earning applicants must have a combined income of £ 100,000 or more, and the maximum loan is 85%.

The return of big credits

After the 2007-08 financial crisis, first-time home mortgage loans in particular were immediately reduced, but in recent years, many lenders have eased credit restrictions.

Further easing is on the cards: The Bank of England has announced it will consult on removing a rule that requires many borrowers to prove they can afford a steep rise in interest rates before they can get a mortgage loan. Currently, with a typical two or five year agreement, lenders must stress test an applicant’s ability to repay their home loan at 3% above the standard variable rate at which the borrower. could access the end of the initial period. . This limits the amounts that many people can borrow.

The new generation of long term fixed rate mortgages avoid these restrictions because their interest rates are guaranteed for the life of the loan. Perenna says, “There are no interest rate stress tests with long-term fixed-rate products because borrowers are protected against any rise in long-term interest rates and will not return to the market. Higher SVR of a lender.