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Voice of the Commonwealth - The Global Influencer

Voice of the Commonwealth - The Global Influencer

Banks are prepared to ‘go large’ on lending. Doesn’t mean a good idea to go for a supersized mortgage

LONDON (CU)_Over the past few years, house prices in the UK have soared at a historical rate, making the dream of owning an affordable, healthy and accessible home more remote. Therefore, several mortgage lenders in the country are looking to tackle the matter by loosening their purse strings and expand the maximum sums they are willing to offer.

In late-December, mortgage lender Habito announced that some homebuyers may be allowed to borrow as much as seven times their salary, well above the traditional maximum of 4.5. Meanwhile, a new lender called Perenna is also set to launch home loans of up to six times salary, over the coming months. Even some of the big lenders including HSBC and Halifax lifted their caps to 5.5 times last year and some experts believe the trend will continue this year as well. 

Some may say that with years of soaring property values leaving large numbers priced out of the market, letting people borrow more is the only realistic solution to the crisis. However, the new deals can only be enjoyed by a limited number of borrowers and they come with plenty of downsides.

Currently, the biggest home loans are being offered by Habito, which is up to seven times the borrower’s income. It is open to first-time buyers, remortgagers and home movers in England and Wales. To qualify for the deal, the applicant must be a teacher, nurse, paramedic, doctor, firefighter, police officer, lawyer, barrister, accountant, dentist, engineer, architect, surveyor or vet, with a minimum annual basic salary of £25,000.

One of the biggest downsides of these deals is that you may be able to sure a much cheaper interest rate on your home loan if you go for a standard shorter-term deal, which allow you to simply move to another competitive deal once the offer period ends. In the case of supersize mortgages, they are either long term or fixed for life. Therefore, these lenders attempt to lure customers by saying they are protected against any threat of fluctuating interest rates since your interest rate is guaranteed for the lifetime of your loan. 

In the years after the 2007-08 financial crisis, rules were tightened to prevent a repeat of the reckless lending, but over the recent years, many lenders have eased these restrictions. Lending rules which are currently in place require banks to stress-test an applicant’s ability to repay their home loan at 3 per cent above the standard variable rate. This limits the amount people are able to borrow to purchase a house. However, these restrictions are avoided by long-term fixed-rate mortgages, since the interest rates on them are guaranteed for the lifetime of the loan.  

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