Halifax provides first-time consumers probability to safe larger mortgages
- Home buyers will need to earn a combined £50,000 to be eligible
First-time buyers could now be able to secure bigger mortgages when applying with Halifax.
The mortgage lender announced today that it is making £2billion available for first-time buyers who need to borrow up to 5.5 times their annual income.
To be eligible for what Halifax is calling its ‘First-time buyer boost,’ buyers will need a total household income of £50,000 or more, which will need to come from employment.
They will also need to be purchasing a property with a deposit of at least 10 per cent.
First-time buyer boost: Halifax has increased the maximum loan-to-income ratio it is offering first-time buyers earning £50,000 or more to 5.5x annual salary
Halifax says the extra borrowing can’t be used towards shared ownership or shared equity schemes.
It could help first-time buyers who earn enough to cover mortgage payments, but struggle to raise sufficient cash for a deposit.
Stephen Perkins, managing director at Yellow Brick Mortgages told the news agency Newspage: ‘This is a very welcome change from the UK’s largest mortgage lender.
‘Affordability has long been a limiting factor for many first-time buyers, despite monthly payments being affordable.’
How does Halifax’s first-time buyer deal compare?
Lenders typically limit most people to borrowing no more than 4.5 times their annual income.
Halifax isn’t the only lender to offer up to 5.5 times income to some borrowers, however. Plenty of banks and building societies already do, though they can only offer this to a certain proportion of their customers, and the rates are usually higher.
Santander offers a 5.5 times income mortgage, but only for those with a combined income of £75,000 or more. They also need to put down a deposit of at least 15 per cent.
HSBC varies its loan-to-income ratios based on the borrower’s deposit size and how much they earn, with higher levels of borrowing reserved for those earning more than £100,000.
But there are some lenders willing to go further, offering up to six times income.
April Mortgages, which launched its first products in April this year, will lend up to six times annual income to eligible first-time buyers, home movers and people remortgaging.
It applies to both individual and joint mortgage applications. This means that two people earning a combined £50,000 could potentially borrow up to £300,000.
Another relatively new lender, Perenna, also offers up to six times a borrowers’ income, subject to them meeting certain criteria.
To get any of these mortgages, borrowers will also need to pass the lender’s credit checks.
Based on an employed household income of £50,000, Halifax’s new offer will increase the maximum loan available from approximately £224,500 to around £275,000.
With a 10 per cent deposit, that could mean the difference between buying a home worth £246,950 and £302,500.
Is it worth it? While borrowing more relative to their income may appeal to some first-time buyers, others will find that a bigger mortgage makes their monthly payments too expensive
Is a 5.5x income mortgage a good idea?
While some borrowers might like the sound of being able to borrow up to 5.5 times their annual income, it doesn’t necessarily mean they can afford to.
Most mortgage lenders will ‘stress test’ the borrower, checking that they could still afford their repayments if the mortgage rate went up when their initial fixed rate ends, usually in two to five years.
For example, on a two-year fix charging 5.5 per cent, a lender might stress test the borrowers’ ability to pay 8.5 per cent, or on a five-year fixed rate paying 4.8 per cent it might stress test at 7.5 per cent.
This means even someone who wants to get a home loan worth 5.5 times their gross annual income may not qualify.
Even if they can pass the lender’s affordability checks, they might feel that taking on a bigger mortgage will make their monthly payments too expensive.
A debt-free couple each earning £50,000 a year might be able to borrow £275,000 at 5.5 times their annual income.
Halifax’s current five-year fixed rate aimed at someone buying with a 10 per cent deposit is 5.19 per cent with a £999 fee.
A £275,000 mortgage at 5.19 per cent being repaid over 30 years will cost £1,508 a month.
A couple each earning £25,000 a year will be taking home £1,793 each month after income tax and national insurance is deducted.
Combined together that’s £3,586 after tax – and that’s before any pension contributions, childcare costs, student loan repayments or other commitments are included.
After paying the mortgage they will have a combined £2,078 a month left between them.
For many people that will be too high a cost. However, for some it may seem like a price worth paying, particularly if their rent was of a similar level.
In reality, many first-time buyers won’t need to stretch themselves to 5.5 times their annual income, particularly those buying in more affordable parts of the country or who have a helping hand from parents with their deposit.
Currently, the average first-time buyer is borrowing at an average of 3.26 times their annual income, according to UK Finance.
