Lenders tempt homebuyers into the big league

Another week, another dizzying house price statistic: there are reportedly now a record 1,000 homes on sale in London for more than £2m apiece.

Given outlandish figures of this kind it may not be surprising that homebuyers are in some cases taking out mortgages of £1m-plus or even up to 10 times their income to help achieve their property dreams.

Such mega-mortgages are still the exception. But the growing gulf between ever-higher house prices and incomes, combined with more flexible lending criteria, mean that more homebuyers are borrowing much larger sums.

Halifax chief economist Martin Ellis says his gut feeling is that many multimillion pound properties in the UK are bought without a mortgage at all, particularly by celebrities and overseas buyers. The lender says that 7,000 homes sold for £1m-plus last year – double the number in 2005.

But mortgage brokers say that wealthy homebuyers can be very ready to gear up, in part because high stamp duty encourages them to make fewer but bigger stretches up the housing ladder. Melanie Bien of broker Savills Private Finance says Londoners on salaries of £100,000-plus are often unbothered about taking out loans equivalent to five or six times their income.

Equally, less wealthy homebuyers may also need to seek out loans for high multiples of their income to get on the housing ladder at all. The fear however is that these high borrowings combined with rising interest rates or drops in income could lead to significant increases in the number of repossessions.

There has been a near-doubling in the number of mortgages taken out for more than £500,000 in the past year - albeit from a low level – according to the Council of Mortgage Lenders (CML), and a growing proportion of loans taken out on income multiples of four or more.

“£500,000 is quite run of the mill now in London,” says Ray Boulger, senior technical manager of mortgage brokers John Charcol. Loans amounting to four times a borrower’s income are now widely available, compared with traditional limits of just three times.

The increase in income multiples available to borrowers reflects a general shift towards so-called affordability-based lending by banks and building societies in recent years.

Rather than setting a limit based on salary, this approach also takes account of a borrower’s outgoings. David Hollingworth of broker London & Country Mortgages says such assessments “can easily add half as much again” to traditional borrowing limits for individuals.

Boulger says that the approach favours richer borrowers who have more spare income: “You don’t spend five times as much [on living expenses] just because you’re earning five times as much.”

He adds that couples on good salaries might now be able to borrow nearly twice their traditional joint 2.75 income limit, with even major lenders such as Abbey now going as high as five times joint incomes.

For some homebuyers affordability-based lending has in effect boosted the amount they can borrow to six times their income. Lenders may also look favourably on those with large deposits.

Mortgage experts say that while borrowing as much as 10 times income might be possible with some lenders, it would normally involve special circumstances such as someone waiting for their own property sale to go through.

Traditionally the route for borrowers to achieve such borrowing multiples has been through self-certification loans, which as the name suggests involve lenders making fewer checks on income than with traditional mortgages.

But big loans and high income multiples of this kind inevitably raise concerns about borrowers’ ability to manage their debts, particularly as interest rates rise.

On a £1m mortgage, for example, the interest alone would amount to £4,000 or more a month at current rates – £50,000 a year. On a loan for 10 times a borrower’s income the interest payments would account for the majority of their take-home pay.

A mere 1 percentage point increase in mortgage rates could then add nearly £1,000 to the monthly interest on that £1m mortgage. A similar increase for the borrower on a high-multiple loan could mean their mortgage taking virtually all their take-home pay.

However, experts argue that with mortgage rates still relatively low and expected to stay low compared with historical averages, borrowers are better placed to cope.

“The cost of servicing debt has nearly halved compared with 15 years ago,” says Boulger. “Today’s much higher borrowings might appear more risky, but the reality is the overall debt burden on borrowers is still often lower.”

In addition, most homebuyers and particularly first-time buyers currently take out fixed-rate mortgages and are therefore protected from further rate rises – at least for the period of the fix – says Sue Anderson of the CML.

Contrary too to suggestions of Britons gorging on super-size mortgages, the average size of loan taken out by homebuyers at the moment is for just £125,000 and on an income multiple of just over three.

Even so, notes Hollingworth: “If house prices continue to rise, more mega-mortgages are inevitable”.