Analysis of high loan to income (LTI) lending from the Financial Conduct Authority (FCA) released this week found that loans issued at 4.5 times income or above had grown by four to seven per cent since the LTI cap was introduced in 2014.
The cap restricted the number of mortgages advanced by a lender at 4.5 times income and above to 15 per cent of its overall book.
The regulator said this indicated lenders had directed their high LTI lending allowance to those with higher incomes, a suggestion backed up by mortgage brokers’ experiences.
The FCA’s data also showed that since the cap, the proportion of homemovers receiving an income stretch had increased, along with joint borrowers. The proportion of first-time buyers who have received an income stretch of 4.5 times or more had reduced. The regulator did not say, however, what proportion of joint borrowers were first-time buyers.
Mortgage Solutions spoke to mortgage brokers based around the country to find out how lenders were applying their high LTI lending.
First-time buyer not a factor
Overall, brokers said it was less to do with whether the borrower was a first-time buyer or homemover and more about how much money they earned.
Rachel Dixon, mortgage adviser and director of RH Dixon, based in Lemington Spa, said most of her clients generally secured loans around 4.5 to five times income, regardless of whether they were first-time buyers or not.
She said the most influential factors were earnings, deposit size and being joint applicants.
“I work in an engineering town, we have Jaguar Land Rover so the workforce is largely professionals earning good salaries, said Dixon.
“I place vanilla business, most of my clients earn more than £40,000 and that’s the income threshold that seems to work in a borrower’s favour.
“Where I struggle is if I see a single applicant. They are often capped at 4.5 times yet the power of two applicants can unlock a higher multiple of say five times.”
For example, a single applicant earning £50,000 could access a mortgage of £225,000 based on a 4.5 multiplier. Joint applicants where one borrower earns £50,000 and the other earns £10,000 might get a five times income stretch taking them to £300,000.
Brokers say that lenders will go up to five times income, and beyond for borrowers including first-time buyers providing they meet certain income and loan to value requirements.
Barclays, for example, will lend up to 5.5 times earnings if a single borrower, including a first time-buyer, earns at least £75,000 or joint borrowers have earnings of £100,000.
However, the maximum loan amount is capped at either the affordability assessment, the income multiple restriction for the borrower’s circumstances, or the maximum loan to value, whichever is the lowest.
Professionals and high earners
Nick Morrey, product technical director for John Charcol, said: “The thinking behind offering professionals a high LTI loan is that their earnings will rise so the multiple of say six times, will come back down to five times fairly rapidly.
“The argument for offering high earners an LTI stretch is that such people have a higher percentage of income at their disposal and can therefore pay a greater proportion of it towards their mortgage.”
Lenders calculate income and treat pension contributions in different ways which can increase or decrease the amount of earnings included in an income multiple calculation.
Jane King, mortgage and equity release adviser at Ash-Ridge Private Finance, who advises clients in London and the South East, said: “I get a better income stretch from Platform because it does not take company pension scheme contributions into account, which reduce someone’s salary.
“For NHS staff, whose pension contributions can be a significant proportion of their income, getting these ignored often bumps up the loan quite significantly.”
The five-year fixed boost
Tyneside-based Brian Dowling, mortgage and protection consultant at Baltic Mortgage Solutions, says to get a higher loan amount, borrowers are being forced into taking five-year fixed deals that come with a more generous mortgage offer than shorter terms such as two-year fixes.
In one case, Dowling said he had a client who wanted a mortgage of £720,000. The lender offered £706,000 on a two-year fixed rate and £850,000 on a five-year deal.
Stuart Powell, managing director of Ocean Mortgages in Plymouth, thinks lenders’ decisions to “play it safe” with income multiples is sensible.
Powell sees a lot of borrowers for equity release enquiries where they have taken a 25-year mortgages on interest-only. Many, said Powell, borrowed five to eight times their income to get the mortgage and now they are struggling to find another lender who will accept an application from them.
“Yesterday I had to tell a client that I could not find a residential or equity release deal for them,” he said.
“Their mortgage term had come to an end and they could not borrow enough for equity release. The new affordability calculations meant that even though the wife was working and the husband was retired no lender would offer the amount they needed.
“They had no alternative but to sell their home. These are the sort of cases we all need to work together to avoid in 25 years’ time.”
A spokesman for UK Finance said: “While mortgage lenders are looking to help customers to get onto the property ladder, they are very careful that this is always affordable. High LTI mortgages are only likely to be available to those who have good prospects for wage increases.
“Before they are able to offer any mortgage, lenders must undertake a strict affordability assessment in accordance with the rules outlined by the regulator, regardless of LTI, to ensure the borrower can repay their mortgage over the lifetime of the loan in all foreseeable circumstances.”