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- 23 Nov 2018
Monster mortgages are a strong topic of conversation in the media at the moment, but the jury is still out on the verdict. Some are relaxed about the topic, while others worry it’s sign of ‘reckless lending’.
Before the financial crash in 2008, there were many jumbo mortgages and 95% or even 100% loans, but the industry changed a lot after the crash and required buyers to have a large deposit. However, it has recently been announced that Clydesdale Bank will grant a first-time buyer a mortgage of 5.5x their income amount, with the potential to borrow up to £600,000 and in some cases with as little as a 5% deposit.
This may sound like a good deal for first-time buyers looking to purchase a house in some areas of the UK, but the question remains; are these mortgages all they’re cracked up to be?
For some time, the upper limit a buyer could borrow was between 4 to 5 times their income, but in most cases, they would need a 10 - 15% deposit to match this amount. The increase in borrowing potential for first time buyers and minimal deposit required for the Clydesdale product offering does rely on the applicant earning an income of at least £40,000, and as with all mortgage applications, eligibility will depend on an income and expenditure assessment to assess affordability for each individual case.
To dig a little deeper into these monster mortgages we’ve asked one of our experts, Associate Director Simon Butler, to answer a few of the burning questions around the monster mortgage, and shine a little light on how tangible these mortgages actually are.
This will completely depend on your present financial circumstances and your future, particularly with regards to any changes to your personal finances and career. Mortgage lenders have taken the decision to relax affordability criteria to allow borrowers the chance to secure funding that would otherwise been out of reach, but your finances will still be thoroughly scrutinised before a mortgage is offered.
Unsecured debts such as credit cards can significantly reduce the level of borrowing available, so just because a lender offers the potential to raise the equivalent of 5.5x your income, it does not mean to say that the loan will be available to all. Several other factors such as financial dependants and age can work against you.
Meanwhile, such a large mortgage loan may be affordable at present, but if you plan to change career or reduce the level of your earnings in the future this could impact your ability to refinance the mortgage in later years. Lenders regularly review criteria, so while a mortgage may be affordable today you could be forced to remain with the same lender on less competitive interest rates because no alternatives are available later on.
While mortgage lenders claim to no longer utilise income calculations to assess the lending limits of a borrower, they do retain an element of this process when assessing affordability.
To fall in line with the Financial Policy Committee and the Financial Conduct Authority’s requirements for sensible lending, the banks now profess to confirm a borrower’s limit by offsetting all acceptable income against a variety of expenditures. These can include, but are not limited to, regular bills such as council tax, utility bills and general living costs such as food and clothing.
The tests also factor in any secured debts, such as mortgage repayments for additional properties and any other unsecured debt, such as credit cards, personal loans and hire purchases. Many lenders also regularly check for school fees, as these will also be deducted from the income.
Once the figures have been assessed each lender will apply their own income multiplier to confirm the level of funding on offer. As has been noted in the case of Santander the level of borrowing being offered has reached as high as 5.5x income, although this would only be available if the client had very little debt or other committed expenditure.
Mortgage lenders tend to suggest that these options are available to any borrower that can confirm full affordability of the loan, while also being able to prove stability to cover the impact of any interest rate rises if market conditions worsen.
Clydesdale Bank have been up front in positioning their own offer by confirming that their higher lending multiples are “available for a very small group of highly qualified customers.” Reading between the lines, this would suggest a focus on those borrowers receiving an income within the higher rate of tax banding will have a better chance of being successful when applying.
The access to borrow a higher level of funding is great news for anyone looking to purchase in hotspots such as London and Bristol. Securing the level of funding required to buy property in these areas has been tough in recent years, but the option to take a bigger mortgage will appeal to many borrowers with the expectation of seeing future income increases to continue covering the mortgage repayments.
The major drawback to raising such a large mortgage will be maintaining the debt and sourcing competitive interest rates to keep the repayments as low as possible. Santander may be happy to lend 5.5x your income, but another lender may not be so keen in two years’ time when your fixed rate expires and your shopping around for alternatives. Likewise, a change to your personal outgoings or income could also prevent you from sourcing better terms for the loan.
Increasing the term of the mortgage can be the best alternative if a lender is restricting the borrowing on offer. By stretching the repayments over a longer period many lenders will increase the mortgage limit.
In addition, a considerable number of mortgage lenders will offer higher lending limits if the borrowing is secured alongside a long-term fixed rate. If you are open to locking into a five or ten-year fixed rate many mortgage lenders will raise the borrowing limit given the added security this provides. As the debt will not be impacted by market conditions for a significant period of time you will find that lenders are willing to take a positive view to higher lending limits.
If you would like to find out more about the monster mortgage or speak to one of our consultants about buying your first home, either call us on 01489 555 080 or email us at firstname.lastname@example.org. Alternatively, if you’re looking for more information about acquiring your first mortgage, you can find our first time buyer guide here.
IPSE are not authorised to offer regulated mortgage advice. IPSE are introducers to CMME.
Your home may be repossessed if you do not keep up repayments on your mortgage.
CMME is a trading name of CMME Mortgages and Protection Limited. Authorised and regulated by the Financial Conduct Authority (FCA reg. 414798). Registered in England No. 04886692. Registered Office: Albany House, 5 Omega Park, Alton, Hampshire, GU34 2QE. Please be aware that Commercial Mortgages, Overseas Mortgages and some Buy To Let Mortgages are not regulated by the Financial Conduct Authority. Calls may be recorded for training and security purposes and to improve the quality of our services.
Ask the expert: Monster mortgages are a strong topic of conversation in the media at the moment, but the jury is still our on the verdict. CMME provides a breakdown on what they are, how they work, who can apply, the pros and cons involved and the alternatives available.
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