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Lenders are still offering loans of up to five times the applicant's income, despite FSA concerns. Rupert Jones reports
Britain's chief financial watchdog is considering a clampdown on mortgage lending which could see maximum loans limited to three or four times a borrower's salary. But research this week by Guardian Money found that, while the credit crunch has put paid to 100%-plus mortgages, some leading banks will still let people borrow as much as five times their income.
And some may be surprised to learn that one of the most generous banks when it comes to so-called "income multiples" is state-owned Northern Rock - which had to be rescued by the government after coming under fire for its irresponsible lending.
On Wednesday, the Financial Services Authority said it was considering capping the amount people can borrow, relative to their income or the value of their property, in a bid to prevent borrowers becoming dangerously overstretched.
There was speculation the FSA would outlaw mortgages worth more than three times the borrower's salary, but the watchdog put off an immediate decision, saying it plans to publish a consultation paper later this year which will look at the various options. However, it says a clampdown on income multiples "merits consideration". The FSA points out that the number of people borrowing more than 3.5 times their salary has risen sharply in recent years - from 20% in 2005 to 30% in 2007 - as borrowers had to stretch themselves to afford rocketing house prices.
Go back a few years and the traditional income multiple - used to help decide how much someone could borrow - would be three to 3.5 times a single income, or 2.5 to 2.75 times joint incomes. But then they started creeping up, with lenders justifying this by saying that bigger loans were the only way to bridge the huge gap between house prices and earnings.
In late 2006, Abbey was criticised for allowing couples to borrow up to five times their combined salaries, while Northern Rock would go even higher.
Nowadays, most of the big lenders use "affordability" calculations, rather than strict income multiples. This means they look at a borrower's individual circumstances - their debts, income and outgoings - to build up a detailed picture.
"Having said that, there are lenders who will still lend on income," says Melanie Bien at mortgage broker Savills Private Finance. "Northern Rock, for example, has very clear and generous criteria - it is prepared to lend up to 4.5 times your income if you are buying on your own, or 4.2 times joint income if you are buying with someone else, as long as you get a high credit score and earn more than £32,500."
Northern Rock says that while it is only the borrower's gross basic income that determines which income multiple applies to them, some bonus and overtime can also be taken into account, which increases the amount people are able to borrow.
When it comes to couples, the bank gives the example of two "medium credit score" borrowers with a total gross basic income of £120,000 who submit a joint application. It says they could get four times £120,000, which adds up to a fairly impressive £480,000. "Most lenders, even those who use affordability criteria, will lend around four times income, although you might be able to get five times for the right applicant with Abbey and Alliance & Leicester," says Bien.
However, it is understood that only a small minority of people would stand a chance of qualifying for a mortgage of five times income at Abbey and A&L, and they would probably have to be high earners with no dependents and no debt.
Ray Boulger at mortgage broker John Charcol says he is surprised the FSA is talking about possibly imposing caps on income multiples, because for several years it has been encouraging lenders to use affordability-based calculations. "It would be complete madness to go back to straight income multiples," he adds.
Concern has already been expressed that this sort of clampdown will reduce consumer choice and make life even harder for many homebuyers.
However, it looks like things will stay as they are for a little while, at least. The FSA consultation paper is due out in September. "As a consequence, any definitive action almost certainly won't happen this year and probably not until after the election," says Boulger.
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