Britain’s building societies have defended their decision to offer mortgages with higher income multiples, despite criticism by the Bank Of England.
Sam Woods, chief executive of the Prudential Regulation Authority (PRA) had warned that heightened competition pressures in the current mortgage war has led to lenders making ‘a material move up the risk curve’ by offering loans with higher income multiples.
Watching them like a hawk
He warned building societies at their annual conference that his department of the Bank Of England would be ‘watching them like a hawk’ as a number of societies started to offer loans at five and a half or even six times income.
The concern is that lending will run out of control in the pursuit of customers with a possible return to the Wild West days which helped trigger the financial crash of 2008.
Association of Mortgage Intermediaries chief executive Robert Sinclair also warned: “You can move to higher income multiples if you are doing it at a decent loan to value and you have good affordability checks going on underneath that. None of this is one-dimensional.
“In the past problems arose through the layering of multiple types of risk at the same time. All the regulator is trying to do is send a warning shot.
If you are going to stretch the boundaries, only do so in one dimension, not in all dimensions at the same time.
“It is clear to most brokers that lenders are widening their stretch across a range of boundaries.
The PRA would not be giving that warning unless there was some evidence of concern.”
But mortgage expert Ray Boulger, of John Charcol, argues that lower interest rates have made higher multiples more affordable than they have been in the past.
He said: “Six times income at today’s interest rates requires lower monthly payments than five times income did prior to the credit crunch.
The whole FCA strategy since then has been that mortgages are assessed on an affordability basis, and I actually think it is regressive for the PRA to be talking about income multiples.”
Craig McKinlay of Kensington Mortgages said: “For young professionals whose current earnings are not reflective of their future earnings potential, and also for some high earners, Kensington is willing, under certain circumstances, to consider higher income multiples on a mortgage application, up to a maximum of six times earnings.”
But there are restrictions on who such offers are made to: solicitors, barristers, doctors, dentists, actuaries, chartered accountants and commercial pilots.
Chief risk officer for Darlington Building Society, Christopher Hunter, said the lender has a rigorous approach when lending at six times income to those in a similar range of professions.
He added: “During the mortgage application process, we undertake a robust assessment of affordability, which considers if there will be, or are likely to be, any future changes to the income and expenditure of the borrower during the term of the mortgage.
“The professionals mortgage is aimed at newly qualified individuals in a limited number of professions, where their income is expected to significantly increase over a period of time.
“The society lends responsibly and each and every mortgage is affordable now on the applicant’s current income.”
Other experts from lenders offering high multiples – like Clydesdale Bank and Loughborough Building Society – have said that careful underwriting, stress testing and additional criteria for these types of loans ensure the extra risk is fully offset with affordability being assessed in detail and in line with regulations.