Highly leveraged mortgages

ended 10. February 2022

A journalist at Thisismoney / Mail Online is working on a piece on highly-leveraged mortgages, as Nationwide has just announced that it will be offering its 'Helping Hand' product (which lends 5.5x salary if the borrower signs up to at least a five-year fix) to those with just a 5 per cent deposit. Previously it was a minimum 10 per cent deposit. 

There have been a few lenders offering more than 4.5x salary recently (notably Habito) and I am interested in views on whether it's a good idea to take on this kind of borrowing, especially given increases in the cost of living. 

What do borrowers need to look out for when they're borrowing a higher salary multiple, and particularly with a small deposit? How can they minmise risk of negative equity and make sure they choose a property that will gain value etc?

Deadline is ASAP.

6 responses from the Newspage community

Borrowers may need to think of alternative solutions to their mega borrowing needs rather than just find a lender who will lend them more. A rapidly growing market is first-time buyers working with their parents to obtain a higher deposit, which decreases the LTV, income multiple needed and often the interest rate. Parents who are prepared to raise funds from their own property as an early Gifted Inheritance can use Equity Release as a potential alternative solution. Rates start below 3% and the kids can even pay the interest, or even the capital."
"It's interesting to see Nationwide putting its head above the parapet and offering 5.5 x income at 95% loan to value. Having said that, usually we will see other mainstream lenders come to market with similar criteria enhancements. It is always good to see innovation in the mortgage market and I am sure the offering will be a success. There can be no doubt that lending at this loan to value and loan to income multiple carries more risk. However, with a 5 year fixed rate, the lender is ensuring that the client can afford the fixed payments for the next 5 years. It would seem Nationwide is confident on property prices increasing over the next five years. In five years' time if property prices were to fall and the client was in negative equity then provided the mortgage has been serviced correctly then Nationwide would likely offer the client another fixed rate without further underwriting. Clients need to do their own stress testing when taking out a loan at these levels. They should consider any future changes to their income and outgoings such as starting a family or changes to their employment stautus. Where possible, (affordable) clients should look to make over payments to help reduce the loan to value. Nationwide allows clients to make over payments of up to 10% of the mortgage balance."
"While many will see purchasing at a higher price as a benefit, buyers should be aware that hardly any lender is this generous to first-time buyers, and you may be unable to remortgage the size of the loan after your initial deal has ended. This can have serious consequences if, as we expect, interest rates rise. Given that the Nationwide product is up to 95%, if the market cools, buyers could find themselves in hot water indeed where they have a loan that can't be remortgaged against a property that is now worth less than the outstanding loan on an interest rate they can't afford. "It's worth noting that you are not eligible for this scheme if you're self-employed. Moreover, it can't be used in conjunction with any scheme or non-standard ownership type (for example, Deposit Unlock, Shared Ownership, Genuine Bargain Price, Forces Help to Buy, Right to Buy Help to Buy), and it must be a repayment mortgage."
"First-time buyers are not comparing how many times their annual income they need to borrow with what their parents had to borrow 30 years ago. They are comparing how much a mortgage payment would be to how much rent they pay be on the same property. Even with just a 5% deposit, the mortgage payment is usually less than the rent for a like for like property so to many it's a no-brainer as they pay their own mortgage instead of somebody else's and live for less than when they were renting."
With house prices around eight times average earnings in England, and eleven in London, borrowing an even higher multiple of income is madness. Instead of encouraging ever greater indebtedness, which of course is how lenders make their money, the UK government should, in my view, be devising a strategy to reduce house prices to the level they were at until the mid-90's, four times earnings. They could do this with a massive ramp in house building, whilst using monetary and fiscal policy to maintain house prices at their current levels in nominal terms, but no higher. Over time, inflation and higher earnings would make property affordable again.
It's a great initiative from Nationwide to borrow up to 5.5x times income but borrowers must have a clean credit profile so any blips will usually mean a straight decline and also meet the minimum income requirements which are a minimum income of £31,0000 for a sole applicant or £50,000 for joint applicants to be eligible for this type of borrowing. What borrowers must consider when trying to maximise their borrowing is what they intend on doing once the current mortgage deal comes to an end as if there is no chance of them earning more money in the near future they may come unstuck and not be able to remortgage away to the best deals available if borrowing multiples tighten up which is likely with rising costs of living so please seek professional advice and be realistic with what you can actually afford as rates will and are rising.