This has come as a result of regulatory changes such as allowing lenders to provide a larger share of residential mortgages at higher loan-to-income (LTI) multiples, a move that is expected to help up to 36,000 first-time buyers.
Mortgage Solutions is asking: Now that more lenders are offering higher LTI multiples, sometimes up to a ratio of six, how likely are you to suggest a borrower use this to the maximum?
Daniel Bailey, owner of Middleton Finance
We are looking at the high LTI multiples with lenders and finding clients come to me and they say, “yes, I can afford this, I just can’t get the mortgage I need”. Like with every client, I judge each case on its own merits. I’m very loath to put clients into an income multiple as high as six.
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This is for a number of reasons. I have to consider future costs, where the client is in their career and whether they are starting a family. I’m always very reserved about putting any clients into the higher LTI, especially at six times multiples.
It also depends on their job situation. I recently had a client who was a doctor, and we did a five-year fix. I knew that in that period, his income would increase quite dramatically. He also didn’t have much debt, so in that situation, I was quite comfortable doing it, and the overall case fit.
There was another case where the client was looking to go beyond 4.5 times income, up to as much as 5.5 LTI. It was something I didn’t recommend because they were a bit older, with two young children and debt; I didn’t think it was the right decision for them to stretch at this point in time. I had to inform them that when it comes to the remortgage, the rate could be higher.
As an adviser, you just judge each case by its merits, and after being an adviser for 20 years, you build up a picture of every client.
Clients always ask how much they can borrow, but it doesn’t work like that. You’ve got to put so many different variables into a calculator, so I try to manage expectations. I would never say to a client, “you can get six times income”; I always tread carefully. I do find that once I’ve gone through the figures, most don’t want to borrow that much, as they acknowledge it is quite a stretch.
Often, we go back to a more realistic four or 4.5 times income. I would be more concerned if my clients were jumping at the chance to borrow that much.
When you talk through other costs and how things might change in the future, that seems to dawn on clients. They realise there’s a chance they could be struggling, and they have a bit of a reality check.
Depending on their age, if they are going for an income multiple stretch, I would advise a longer term of at least five years so they have stability and tell them that there are overpayment options.
Carmen Green, mortgage adviser at Xpress Mortgages
I would not necessarily suggest clients be conservative with their borrowing, as it ultimately comes down to the affordability of the monthly mortgage payments. Someone with 4.5 times their income and no debts will have a different affordable budget than someone who has more outgoings.
It’s just not possible to buy a property with 4.5 times income in some parts of the UK, and if someone had to relocate to a cheaper area and then commute to work and to see family and friends, that can be more expensive than stretching to a slightly bigger mortgage without the commuting costs. Someone on an upward career path who is expecting to earn a higher income in the not-so-distant future may prefer to stretch themselves now rather than want to move again in the short term when their financial position improves.
In many cases, it’s the monthly repayments that are capping what borrowers can afford rather than the income caps. I find the requirement for higher LTI depends on the area they are looking to buy. In London and other affluent areas, this is needed because renting costs are usually higher than mortgage payments would be.
I usually find that single applicants taking a mortgage need this higher income multiple, whereas joint applicants may not.
Overpayments are always a good idea to reduce the balance, reduce the overall interest paid and increase the equity. Sometimes you will pay a higher interest rate to access the enhanced income multiples, or the terms of the product don’t suit, so it won’t be suitable for everyone.
I have already had several conversations with my clients about the different lending amounts available and what that would mean for their budgets. Ultimately, our job is to find the options and present these to our clients with the pros and cons. As long as I feel that this is understood fully, I will continue to recommend six times LTI options when they are available.
El Deane, mortgage adviser at Yes Mortgage Services
It is very important to highlight the implications of borrowing a high multiple of LTI when it comes to considering whether clients’ income will go up over the course of their product, and what that means for affordability at the end of their product, when six times LTI may not be available as homemovers or non-first-time buyers. But one size does not fit all; the advice is personal to each client and their circumstances.
It is also important to consider whether a property will have appreciated in value, and if a high LTI coupled with a high loan to value (LTV) will cause potentially foreseeable harm to clients at the end of their first product with this high LTI.
I don’t anticipate many buyers will want to use the full six times LTI. Instead, this increased flexibility gives buyers, particularly first-time buyers, more options. It has helped many people secure their ideal property by bridging the gap between what they can afford and the price of the home they want to buy. The higher LTI simply provides a little more slack in the market.
A high LTI might be suitable for borrowers who are on a stable career path with regular, predictable pay rises (for example, some doctors or other professionals). Their income growth over time could naturally reduce the LTI ratio of their mortgage. Personally, I have transacted cases nearing 5.5 times in first-time buyer cases and for an NHS locum doctor.
The Yes Mortgage Services approach is to always provide tailored advice that prioritises the client’s long-term financial wellbeing.
All mortgage applications are subject to a detailed affordability assessment based on an individual’s circumstances.
