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Inside edge: Robert Clifford

Talking to our franchisees across the country, a new topic has taken over from the awful summer weather – income multiples. Most are wondering what all the fuss is about and that&#39s exactly my feeling, too.

Many pundits are fearful that the apparent shift from a maximum of three times income to folklore figures of up to 10 times will spark a property market crash and record levels of arrears. Rubbish.

Multiples were used when I came into the mortgage market 16 years ago but were frequently overridden by an experienced and trusted branch manager. A lender&#39s published standard of three times income was quite often raised to four times income for the right candidate. Many people can, of course, afford to borrow many more times their income than a nominal standard of three.

A crucial factor – perhaps ignored in the current noise about multiples – is that three times income was felt to be appropriate when mortgage rates were 16.5 per cent. So how can three times still be appropriate when rates are two-thirds lower today?

Some say that income multiples are being used to create competitive advantage more than ever before. They claim that brokers would traditionally recommend a lender based largely on its product pricing as the loan amount available would be similar regardless of the lender. Many traditional lenders are now shouting “foul” as more and more of their competitors increase market share by stepping outside the typical income multiples and offering upwards of four or five times income. What&#39s wrong with it?

Our consultants find that Chelsea, Derbyshire and Portman are rigid on their multiples, regardless of wider circumstances. We are hearing from clients that these staunch mutuals, including Britannia, still apply a maximum of 3.5 times income, which results in clients looking elsewhere. Perhaps blinkered mutuality can lead to commercial ignorance.

Mortgageforce product analyst Nichola Kitching tells me that Abbey National, Northern Rock and Standard Life Bank are prepared to consider 4.2, 3.8 and 5.5 times income respectively, depending on client circumstances. One of these lenders offers three times joint incomes and another offers four times joint incomes.

Some of these extended income multiples are restricted to loan to values lower than 95 per cent or perhaps subject to an applicant having evidence of increased future earnings. Historically, some lenders offering to lend more than the norm would seize the competitive advantage by applying a different interest rate or by making more attractively-priced products unavailable to these borrowers.

Bucking this exploitative approach is Royal Bank of Scotland, which is offering five times income for young professionals but doing so right across its product range and still making the multiple available to those requiring 100 per cent. Absolutely nothing wrong with that.

I do, of course, understand the arguments which revolve around clients becoming overcommitted and lenders seeing possessions soar but let us be honest about lenders&#39 motives.

If all the fuss is truly about the lender&#39s security, then lenders should control this by playing around with LTVs and ensuring there is sufficient equity in the event of default. But if, as some lenders claim, it is about taking care of consumers and making sure they do not overstretch themselves, let&#39s get real. Whatever happened to caveat emptor? Let a consumer exercise his free will. If I have three pints of shandy, I know I will be fine, whereas if I have eight pints I will be in a mess. My wife might warn me but cannot take the decision for me.

Traditional lenders should carry on with their three times income multiples and stop moaning about competitors which break the mould and open up home ownership for thousands of borrowers who would otherwise be cast aside.

Robert Clifford is chief executive at national broker franchise mortgageforce

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