Several lenders in recent weeks have increased the income multiples, including Metro Bank, Santander and MPowered Mortgages.
As part of the Mortgage Market Review, the Financial Policy Committee introduced the affordability stress test and LTI ratio to limit borrowers overstretching themselves with large loans.
The LTI ratio or limit refers to how much the mortgage applicant can borrow relative to their income. It states that new residential mortgage loans with an LTI ratio of 4.5 or more would be limited to 15 per cent of total new mortgage loans.
When the affordability stress test was removed in 2022, the Bank of England said that keeping the LTI limit “ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
However, some lenders have been increasing the maximum amount they can loan, within regulatory limits, in order to become more competitive and offer better choice to customers.
Lender view of LTI
Emma Hollingworth, managing director at MPowered Mortgages, said that it had initially restricted the LTI to 4.49 to assess cost of living impact on household finances, and it had now returned to the higher limit of 5.5 for employed applicants.
“The broker response to this has been broadly positive, but on its own, is not enough to support borrowers, in particular first-time buyers, and hence why we have sought to make further enhancements to our affordability assessment that should see more customers able to attain the some of the new higher LTI multiples,” she added.
Hollingworth said it was likely that households on higher incomes would benefit more from the change, but the impact of higher marginal tax on higher incomes and the government’s decision to free income tax thresholds would “dampen any benefit”.
She explained that the “biggest challenge” for customers looking to benefit from high income multiple was passing the affordability assessment on the higher loan amount. Lenders who consider certain incomes others don’t or take a higher weighting could help borrowers achieve higher LTIs.
“As a responsible lender, our primary focus is affordable lending that can be sustained through the cycle. This means that where we are lending at higher income multiples, we need to be confident that the income used to support the mortgage is sustainable, and that the customer can demonstrate a strong record in how they utilise and manage their use of credit,” she added.
Hollingworth said that it believed in most cases the LTI limit was the “right thing for the market” but that there were “nuances”.
“We can understand that this approach might prove unaccommodating to certain types of lenders’ propositions, and that exclusions could be applied, for example, lifetime fixed mortgages,” she noted.
Increasing LTI limits ‘fairly common practice’
Dean Esnard, director at Magni Finance, said that as a large loan broker it regularly helped borrowers secure 5.5 times income.
“In the last year, we have seen more high street lenders enter this market. Although their criteria differ in terms of the required income and loan to value (LTV), Barclays, Santander, HSBC, Accord, Nationwide and Natwest now offer some form of 5.5 times income to higher earners.
“Most of these lenders also have specialist large loan teams with more experienced underwriters to deal with the growing number of larger mortgages mainly in London and the South East,” he explained.
Luke Thomspon, director at PAB Wealth Management, said that increasing LTI limits were a “fairly common practice within the mortgage market”.
“At the end of last year, most lenders reduced their LTIs as they wanted to assess the impact of the rises in the cost of living on customers especially in the face of fast-rising interest rates.
“Now that they have had more time to assess the situation and with the recent rate reductions, lenders would appear to be more confident and, with this, means the potential for LTIs to move closer towards what we had seen in the past,” he noted.
Thompson said it was important to note that to benefit from higher LTI limits, it was often necessary to put down a larger deposit and have a higher income which could mean a lot of applicants don’t qualify.
Gary Boakes, director at Verve Financial, said that with rates as “low as the lenders can go at the moment” criteria and LTI limits would be the “next thing the lenders change to gain business”.
“This is going to be a common trend over the next six months as lenders fight for business. I fully expect leaders to follow suit with the LTIs and with changing criteria and interest-only probably going to be the big one this year,” he added.
Boakes said that the issue was the average house price to average income was around seven times income, so “something does need to change long term”, but the move to five times income was “going to help buyers bridge this huge gap”.
According to the Intermediary Mortgage Lenders Association (IMLA) figures from November last year, the average price of a house in the UK surged to 8.8 times the average income. This was up from a previous high of 8.7 times in August 2007.
This was echoed by Nationwide around the same time who said that first-time buyers would need to save record 110 per cent of earnings for a house deposit.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said that the move from lenders like Santander was “of course, welcome” and noted that if more large lenders increased their limits, this could have a “ripple effect” where lenders would review this area of criteria, even if they didn’t change it.
Increased borrowing limits “last thing we need”
Justin Moy, managing director at EHF Mortgages, said that the market had to be “careful” with increasing LTI limits as rates are still “relatively high”.
He continued that other lenders would be curious to see how much more any given client could borrower where lenders have relaxed their calculators.
“There will be plenty of borrowers looking to consolidate other debts, or have had some changes to income since their original mortgage advance, so may genuinely benefit in the short term, but the longer term impact of increased borrowing needs education too. This may be where the relatively free access to car finance and credit cards are curtailed,” Moy noted.
Graham Cox said that LTI limits were “fine in my opinion” adding that the market needed to “get away from this extend and pretend mentality, where house prices are propped up with longer maximum terms and more lenient lending limits”.
“They are making the housing crisis worse by trying to fix the symptom rather than the underlying problem, namely that house prices are too high, and out of all proportion to average earnings,” he said.
Lewis Shaw, owner and mortgage broker at Riverside Mortgages, said that in a period of economic uncertainty, high inflation and political instability the “last thing we need is lenders increasing the amount people can borrow”.
He said: “A few years ago, some people were complaining that affordability was too strict. As soon as rates jumped up to something like normal, those same people were complaining and wanted bailing out, and now the ship seems to be steadying, we’re having another conversation about increasing the extent to which someone can become indebted.
“More credit availability leads to higher house prices. We need to restrict borrowing and try to drag the public off the cocaine of house price rises and our addiction to property shows. A home is somewhere to live; when did so many forget that?”
