Mortgages : Warnings as salary multiple allowances reach 5 times salary.

Abbey, Britain's second largest home loan provider, came under fire at the beginning of November 2006 after it announced its intention to offer borrowers mortgages for up to five times their salary in order to help them gain a foothold on the property ladder. Abbey said it was reacting to burgeoning house prices; its offer is being made available to individuals or couples with a deposit of 25% and an annual income of, or in excess of, £60,000 per annum.


However, rising voices in the consumer credit counselling industry warn that borrowing on such a large scale could result in prospective home buyers becoming "very stretched". Under Abbey's scheme, a couple borrowing £250,000 from the bank could face repayments of around £1,400 a month - totalling up to £17,000 a year. But the bank claims that only borrowers with good credit ratings would be eligible for the service. Abbey spokesman Dave Stewart said:


"Our customers are continually asking for more money to purchase the house they want and subsequently we looked into the affordability ratings of certain people... We found that people could afford to pay out for bigger mortgages but there just wasn't anything on the market at the moment offering them what they needed."

Present industry practice is to offer borrowers mortgages that lend up to three and a half times their salary. However, many mortgage analysts believe that Abbey's move will encourage other lenders to start a similar trend; last week, Bank of Ireland Mortgages and Bristol & West increased their standard salary multiple allowances from 4 to 4.5.


Following Abbey's announcement, the Bank of England raised interest rates by 0.25% to 5%, but will this help curb increasing consumer borrowing? According to Consumer Credit Counselling Service Chief Executive, Malcolm Hurlston, Abbey's new mortgage lending schemes proved a significant risk for borrowers.


"For some people, this is going to look like an answer to their prayers but it risks taking them into dangerous territory. If their salaries do not go up in the way they think, then they are going to be very stretched."


If anything, Abbey's move stresses the importance of comparing mortgages for both first time buyers and existing home owners. Ray Boulger, the senior technical manager at independent mortgage brokers John Charcol, claims it is possible to get similar loan terms from other mortgage lenders.


"There is a responsibility on the borrower. There will be some who feel perfectly comfortable borrowing that amount of money because they have a lifestyle which means they can afford it. However, there are others who prefer to spend more on luxuries and for who it is not suitable."