When it comes to getting on the first rung of the housing ladder in 2006, anything goes – so just borrowing the maximum from a mortgage lender will barely raise an eyebrow. Although house price inflation is slowing, it’s still forecast to be 5 per cent during the course of 2006, according to Nationwide Building Society – in other words, still running ahead of both inflation and rises in earnings.
[SUBHEAD]
Income multiples
Working out how much you can borrow used to be simple. Lenders employed standard income multiples of 3.5 times a single salary and 2.75 times joint. Over the past few years this has changed into a more relevant 4 times single and 3 times joint, according to David Hollingworth at mortgage broker London & Country.
But the concept of set income multiples is becoming increasingly redundant – the level that applies to each applicant will now depend on a whole host of factors all of which signify how much the lender will get in return. For example, if you earn a salary of £35,000 or above and can present a 5 per cent deposit, Coventry Building Society will take its multiples up to 4.3 times a single income.
If you agree to opt for the security of payments offered by a longer-term fixed rate, you may also be lent more. Accord Mortgages, which is part of Yorkshire Building Society, lends some borrowers up to five times salary if they take a five-year fix.
Being a graduate also has its advantages, as it is believed that you will be a higher earner in the long run. Scottish Widows will lend up to five times a single salary, with a loan-to-value (LTV) of 102 per cent. HSBC will also lend over the odds to borrowers who have graduated in the past five years and won’t ask for a deposit.
Northern Rock will even stretch to 5.9 times income if you fit the bill. But this is rare, says a spokesman for the bank, Ron Stout. Qualifying for this amount would entail earning more than £100,000, having a flawless credit rating and taking a long-term fixed-rate deal.
[SUBHEAD]
Affordability
However, an increasing number of lenders are dispensing with income multiples altogether and replacing them with the type of affordability system already employed by European lenders.
When assessing borrowing levels using ‘affordability’, the lender will first look at your entire range of existing financial commitments. That’s everything from personal loan and store card repayments through to running a car and paying your council tax. Alongside your proposed mortgage repayment, this total expenditure must not exceed a certain proportion – usually 40 per cent – of your net monthly income. In addition to this, your credit score will be considered as well as your life situation, such as whether you have dependants.
Affordability is a more sophisticated way of calculating what you can actually afford to borrow in terms of monthly repayments and is something lenders have been able to do as a result of improved technology, says Hollingworth. In most cases it means that applicants can borrow more than they would using income multiples but only if their financial situation allows it.
Following encouragement from the Financial Services Authority (FSA), a considerable number of lenders have now moved over to affordability, including Halifax, Alliance & Leicester, Intelligent Finance (IF), the Royal Bank of Scotland and Cheltenham & Gloucester. Nationwide still uses income multiples and has recently increased them to 4.2 times income for both single and joint salaries. However, this is because they now form only part of a wider affordability calculation in which all of the borrowers’ finances are assessed. An assumed interest rate is also used to calculate affordability, mitigating the effects of any potential rate rises.
In short, what you can borrow will come down to the individual. We have done deals with IF and Standard Life Bank where we have negotiated between five and six times salary for our clients, says Nick Gardner, director at mortgage broker Chase de Vere Mortgage Management. This is done very much on a case-by-case basis, and the applicant usually needs to have virtually no other credit commitments at all.
When going to a lender that uses affordability criteria, it becomes especially beneficial to clear your debt first. Paying off £2,000 could mean borrowing another £8,000 on your mortgage, according to Ray Boulger, senior technical director at broker John Charcol – which can constitute a very welcome trade.
[SUBHEAD]
Using your parents’ income
But these days, there is nothing to stop you recruiting other salaries to help you afford your first home. A number of lenders offer schemes that allow your parents to boost your borrowing capacity – and they won’t have to part with a penny.
The Bank of Ireland’s 1st Start scheme [see box] offers first-timers an income multiple of four times salary, or, perhaps more usefully, will lend four times the parents’ income after their existing mortgage repayments have been deducted, explains Gardner. Alternatively, the bank will lend 2.75 times both the parent’s and child’s income.
The mortgage will be written in both names but – as it’s only secured on the child’s property – the parent’s home is not at risk. In addition the property deeds only need to feature the child’s name so the parent will not incur capital gains tax liabilities when the property is sold. The deal is available up to 100 per cent LTV. On this basis, the cheapest version is a two-year discount mortgage with a current pay rate of 5.64 per cent.
Alternatively, most lenders will allow parents to act as a guarantor for their child on any shortfall in income multiples. So, if the child qualifies for a £100,000 loan but needs £160,000, the parent will guarantee £60,000. Look out for tax exposure here, says Gardner. The Bank of Ireland does not require parents to be named on the property deeds. The Woolwich does but allows you to split ownership 99 per cent to one per cent, minimising your tax liability.
[SUBHEAD]
Borrowing more than 100 per cent
If your own affordability or income multiples don’t add up, and your parents aren’t in the frame, there are always mortgages that lend 100 per cent or more of the property value.
Scottish Widows for example will lend 110 per cent of LTV but only to those in professional occupations – namely doctors, dentists, solicitors, accountants, pharmacists, teachers or vets.
Northern Rock’s Together mortgage range is available to anyone. It allows you to borrow 125 per cent of the property value – 30 per cent of which is lent on an unsecured basis (like a personal loan) but is charged at the same rate of the mortgage.
Mortgage Express also offers loans of up to 130 per cent of the property value. In this case however the entire loan is secured on the property, meaning the borrower is in negative equity from day one – so it’s a little riskier, says Gardner.
If you are borrowing a high proportion of the property price – typically 90 per cent or more – look out for the mortgage indemnity guarantee (MIG), otherwise known as a higher lending charge (HLC). This charge is effectively an insurance that covers the lender should you default on the loan – but you pick up the bill. Lenders such as Northern Rock, Nationwide, HSBC and Cheltenham & Gloucester tend not to charge MIG but rates could be higher to reflect it.
[SUBHEAD]
Tradition can be best
Borrowing money for a house is one area when it pays to stick with tradition if you can. Borrowing 3.5 times a single salary, with a five per cent deposit, having cleared your debts, first may seem old-fashioned but it will mean cheaper rates and a wider selection of lenders – a position you may not want to stray from if you don’t have to.
[BOX HEAD]
1st Start
How you could boost your borrowing with Bank of Ireland’s 1st Start deal
Firs
t-buyer salary = £20,000 a year (they would qualify for an £80,000 mortgage)
Parents’ earnings = £35,000
Parents’ mortgage commitments = £3,750 a year (based on the interest of a £75,000 mortgage at 5 per cent)
Remainder = £31,250
Bank of Ireland will lend four times this = £125,000
Plus one times the child’s income of £20,000
Total loan = £145,000.
Borrowing boosted by £65,000
[END BOX]
