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Multiple personality

House price inflation has far outstripped the rate of increase in wages and borrowers have been looking to step outside the traditional income multiples.

This has been one of the prime difficulties facing the first-time buyer as the multiple required to buy a property has reached an unobtainable level.

It is not just the FTB who has seen the required income multiple increasing. People making a next-time purchase have the benefit of a chunky deposit from their property equity but there is often a big step up in mortgage size not matched by a rise in income.

The industry came under the spotlight when a Money Programme investigation claimed that some borrowers were being encouraged to inflate their income on self-cert products to hit the target amount.

Lenders are in a difficult position as they want to provide mortgage products and lending criteria that meet the demand of customers but must keep a responsible approach to lending.

This poses two questions for lenders – is it feasible for them to increase the level of borrowing without overstretching the borrower and, if so, how to go about it?

We all know that the traditional multiple of three times single income is a thing of the past and there are solid arguments that present multiples could be increased.

The old multiples stayed much the same since the days when interest rates were much higher than today. For example, in early 1990, mortgage rates hit 15.4 per cent but now even standard variable rates are typically 6.5 per cent or below.

Today’s borrower would be contending with monthly payments at a third of the cost of the early 1990s so mortgages are very affordable.

Economist John Wrigles-worth recently observed that the fact that the house price to earnings’ ratio has topped 6.25 is not of great concern as many would indicate that despite being way above the levels before and during the housing crash. He argues that a more valid measure would be to look at the mortgage payment as a percentage of income.

This gives a very different picture with current figures below average and leading Wriglesworth to conclude that borrowing capacity could safely be increased significantly without over-extending borrowers, on the proviso that budgeting certainty is instilled through the use of longer-term fixed rates.

This brings us to look at what lenders have done to improve their flexibility and where the market is likely to head. Lenders have looked to raise multiples in a number of ways, including increasing the multiple when a fixed rate was used, a method adopted by Halifax and still used by North- ern Rock. But Halifax, which went so far as to enhance its multiples by 1.25 for the use of a 10-year fixed rate, did receive some adverse publicity from the consumer press, so perhaps we still sometimes struggle to see beyond the stan- dard multiple.

Lenders now have information readily available enabling them to assess which borrowers should be eligible for higher multiples. This tends to be based on the lender’s own credit-scoring (typically bracketed into high, medium and low) and also on the level of earnings, building a matrix of multiples that can push well beyond standard multiples.

Other lenders, such as Nationwide and Standard Life Bank, have taken more radical action, developing affordability models and consigning multiples to the scrapheap. The market has continued along this path, with Halifax, C&G and IF among others using affordability models.

Affordability allows more significant borrowing in the right circumstance whereas people with lower incomes and other debt will get a more modest mortgage.

For example, Alliance & Leicester, the most recent to join the ranks of affordability lenders, can reach five times joint income in some cases.

A more individualised approach is clearly a step forward and media reaction has been positive and from a broker’s perspective there is plenty to favour.

A potentially problematic area is a lender moving to a new model, ditching multiples but not providing any method of assessing whether a case is even feasible without carrying out a credit score and check.

There is nothing more annoying than being told, “I don’t know if we might lend that amount” and not being offered a further solution. In addition, multiple credit searches on a borrower’s file could affect their score. Thankfully, most lenders have developed a quick calculator to give a ballpark figure.

Far from being carte blanche to lend more, these approaches will become more sophisticated (A&L factor in regional cost of living by postcode) and the solution more bespoke. These models help the lender, broker and, most important, the borrower and are likely to proliferate, potentially signalling the death of income multiples.


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