A mortgage lender is now allowing home buyers to borrow seven times their salary in order to ‘secure their dream home sooner’ – but there are several catches.
Mortgage market disruptor Habito has changed the terms of its Habito One product to allow certain types of borrowers the much larger loan-to-income ratio.
Usually, banks allow borrowing of up to 4.5 times the applicants’ combined salary.
There is a further catch with Habito’s mortgage – borrowers must agree to fix their interest rate for the full term of the mortgage; between 15 and 40 years.
Habito says being able to borrow 7 times their income could allow home buyers to purchase a larger home sooner than they would otherwise be able to – but there are catches
Habito’s seven times income offering is only available to applicants in the following professions: firefighters; police officers; NHS doctors, nurses and paramedics; teachers in the public sector; accountants; lawyers; barristers; civil engineers; dentists; architects; surveyors and vets.
They must be qualified, practising and registered with the appropriate industry body.
It will also accept applications where at least one borrower earns a salary of £75,000 or more in any profession.
In joint applications only one borrower will be able to borrow 7 times their salary, even if both are in an eligible profession or earn more than £75,000. The other will be able to borrow up to 5 times their salary.
In contrast with Habito’s long-term fixed rates, usually, borrowers only fix their rate for two or five years, after which time they can remortgage to another product.
Applicants who don’t fit the criteria can still get a Habito One mortgage with a rate fixed for the whole term, but will only be able to borrow up to 5 times their salary.
All of the Habito One products come with a hefty product fee of £1,995, though this can be added to the loan.
What are the rates, and is a long-term fixed rate a good idea?
Rates on Habito One products start from 2.79 per cent, if the buyer has a 40 per cent deposit, takes the mortgage on a 15-year term and agrees to pay an early repayment charge (ERC) if they later decide to remortgage or pay off the loan early.
Without an ERC, the cheapest rate is 2.99 per cent.
For those with lower deposits, the rates are far higher. A borrower with a 10 per cent deposit taking the maximum 40-year term, with no early repayment charges, would pay 5.60 per cent.
The cheapest rate available elsewhere on a standard, two-year fixed mortgage with borrowing up to 4.5 income is much lower.
The rates available on Habito One mortgages are higher than the market average
At the moment, a borrower with a 40 per cent deposit could get a rate of just 1.11 per cent with Barclays, with a £999 fee.
Even if they only had a 10 per cent deposit, they could get a rate of 1.61 per cent with a £1,249 fee with Platform.
According to the latest Moneyfacts data, the typical rate on a two-year fix for someone with a 10 per cent deposit is now 2.51 per cent, far lower than the 3.79 per cent of December 2020, and lower even than pre-pandemic.
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Whether fixing a mortgage rate for the long term is a good idea depends on the rate offered, and where the borrower believes rates will go in the long term.
While still very low in historical terms, interest rates are now edging up after months of sustained falls.
This is because the Bank of England increased its base rate from 0.1 per cent to 0.25 per cent this month.
It is predicted to rise further in 2022, with some estimates suggesting it could rise to 0.50 per cent over the year.
If the base rate, and therefore mortgage rates, were to increase much more substantially than that over time, then fixing for life on Habito’s rates could start to make sense.
In October, the OBR warned of a worst-case scenario whereby a ‘wage spiral’ or energy price shock would cause the base rate to increase to 3.5 per cent in 2023.
If this extreme scenario became a reality, a mortgage fixed for life on one of the Habito One rates would start to look like a better deal.
Habito One customers would be able to exit the mortgage at any time if they saw a better deal elsewhere, but only if they had chosen the ERC-free option.
Is borrowing 7 times your income sensible?
Offering a higher loan-to-income ratio means that those on lower salaries find it easier to qualify for a mortgage, and enables borrowers to afford a larger or more expensive property than otherwise possible.
This could potentially mean that they could skip buying a smaller ‘starter home’ and go straight to owning a larger family house to stay in for the long term, Habito said.
However, borrowers should think carefully about borrowing a larger-than-average sum, as their monthly mortgage payments will be higher and could be more difficult for them to cover if their financial circumstances changed.
The essential workers that Habito is offering the additional borrowing to are perhaps less vulnerable to losing their jobs, but they still need to ensure that they can comfortably afford their monthly payments.
NHS workers are one of the groups that will be eligible for Habito’s new mortgage offering
Typically, lenders will advance borrowers a maximum of 4.5 times their salary. They can choose to offer some borrowers slightly more, often up to 5.5 times, but Bank of England rules strictly limit the number of loans they can give out on these terms.
Applicants for the Habito One mortgage borrowing 7 times their income will also need to have the equivalent of 10 per cent of the amount they are borrowing left over in cash once they have paid their deposit.
They will need to earn at least £25,000 a year, have a good credit score, and to have been employed full-time for at least one year, as opposed to the industry standard of 3 months.
Habito says that these extra requirements will ensure that customers are borrowing ‘safely and securely’.
Daniel Hegarty, founder and CEO of Habito, said: ‘We believe this will be particularly attractive to those who want to buy a home with lots of future potential, or for people who are expecting pay-rises over their careers, as Habito One enables them to choose to make unlimited overpayments to become mortgage-free sooner.’
Only being able to borrow 4.5 times their salary often means that buyers have to save substantial deposits to afford a home, especially in areas where house prices are high.
According to Aldermore Bank, first-time buyers have been forced to find, on average, an extra £23,000 to purchase a home since the start of the pandemic due to runaway house price rises.
Are similar deals available elsewhere?
Banks are able to offer some mortgages of more than 4.5 times their salary, but the number they can give out is strictly limited because of the risks involved.
The Bank of England had considered increasing the proportion of large mortgages lenders can offer to people who need to borrow more than 4.5 times their salary, but it recently rejected the idea.
Some banks are independently adjusting their loan-to-income ratios, but they must only do so within the existing rules.
For example, Nationwide increased its maximum loan-to-income ratio to 5.5 earlier in 2021, though it can only offer the deal to around 5,000 households per year.
The amount Habito can lend on its Habito One mortgages is capped at £1billion.
With the typical mortgage amount sitting at around £200,000, this again would mean that around 5,000 households could benefit.
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