Coventry Building Society has increased its maximum loan-to-income ratio for eligible first-time home buyers to 6.5 times salary with a 5 per cent deposit.
Under the new rules, a single applicant earning the average salary could potentially borrow up to £255,190 to buy a home. This would be enough to purchase the average first-time buyer property in England, priced at £245,450, with a 5 per cent deposit of £12,273. Under the lender's previous rules, a buyer would have required a deposit of £69,173, or 28 per cent.
The mortgage rate will depend on the size of the deposit put down by the borrower. Single home buyers need to earn at least £30,000 to apply for the mortgage, while couples need to earn £50,000. Self-employed people are not eligible.
Other lenders offer borrowing limits of 6.5 or seven times salary, but they require higher deposits of at least 15 per cent of the property's value. Banks and building societies are launching such deals to cater to a growing cohort of aspiring home buyers who are handing over more in rent than they would pay for a mortgage every month, but cannot get on the property ladder because of their income limits.
For some buyers, especially single people, the normal maximum borrowing of 4.5 times their income, added to the typical 10 to 20 per cent deposit a first-time buyer might save, does not cover the amount needed to buy a home in their area. Previously, buyers had to save a larger deposit so that total borrowing would be less, but lenders are increasingly allowing borrowers to take out more than 4.5 times their income as long as they can prove they can afford the repayments. Coventry Building Society is one of the largest building societies in the United Kingdom, headquartered in Coventry in the West Midlands.
Assistance for single buyers
Matthew Carter, of Coventry Building Society, said the lender wanted to help those who did not have assistance from the Bank of Mum and Dad, a term widely used to describe financial help provided by parents to their children. "As house prices have risen, the gap between what a single income can borrow and the cost of a typical first home has become increasingly difficult to bridge," Carter said.
"Homeownership shouldn’t depend on having access to the Bank of Mum and Dad, and it shouldn’t feel especially out of reach for those buying on their own," Carter added.
The deal could also assist those who want to skip the first step on the housing ladder and move straight into a more expensive family-sized home, something which is increasingly common as people get on the housing ladder later in life.
Aaron Strutt of London-based mortgage broker Trinity Financial added: "It shows how keen lenders are to attract more first-time buyers and make it easier to get a sufficiently large mortgage to buy the property they want."
"For many first-time buyers the thought of borrowing up to 6.5 times salary is not that appealing, but they will do it if it means they can get on the property ladder," Strutt said.
Lenders offering high salary multiples
Which lenders offer bigger mortgages? April Mortgages, a lender relatively new to the UK market, gives buyers the biggest loans based on their income, enabling them to borrow seven times their salary. Borrowers must earn a minimum of £50,000 per year whether applying as a single or joint applicant, put down a 15 per cent deposit, and fix for at least ten years.
Tipton Building Society offers up to 6.5 times income, but borrowers must put down a deposit of 20 per cent or more. There is no strict minimum income requirement as the lender assesses applicants based on their individual circumstances.
Nationwide Building Society, the largest building society in the United Kingdom, offers a Helping Hand mortgage that lends six times income. It has a deposit requirement of 5 per cent based on a five-year fixed rate, and buyers must earn £30,000 per year if applying alone, or £50,000 jointly.
NatWest allows mortgage borrowing of 6.5 times income, but only for high earners with an income of £150,000 or more who are putting down a 25 per cent deposit. HSBC also has a 6.5 times loan-to-income mortgage, but it is only available to its Premier bank account customers, who must have a yearly income of £100,000 or more, or have £100,000 in savings or investments with HSBC.
Zero deposit and low deposit alternatives
Another option for first-time buyers who are struggling to get on the property ladder is a zero deposit mortgage. These are aimed at those who earn a big enough salary to get the mortgage they need, but cannot save a big enough deposit, perhaps due to paying high rent. To solve this problem, more lenders are offering mortgages with deposits lower than the traditional 5 per cent, often 1 or 2 per cent, or even no deposit at all.
An example is Skipton Building Society's Track Record mortgage. This allows tenants to borrow up to 100 per cent of the value of a property as long as they can show a track record of paying their rent on time and can prove they can afford the mortgage payments.
What is the catch? Both of these types of mortgage often have higher interest rates than the borrower would be offered if they had a larger deposit or were borrowing a lower multiple of their salary. Borrowing a large amount in relation to your salary means your mortgage payments will be higher than that of other homeowners, and risks the payments becoming difficult to manage if your circumstances change.
Samuel Mather-Holgate, managing director at Swindon-based financial advisers Mather and Murray Financial, said: "Stretching loans to 6.5 times income risks turning aspiration into financial overreach."
"Larger loans and high loan-to-value deals may open the door, but they can also leave households dangerously exposed if [mortgage] rates stay higher, wages stall or property prices dip," Mather-Holgate added.
Taking a mortgage with a low deposit brings the risk of negative equity if house prices fall. Negative equity occurs when the market value of a home drops below the remaining balance of the mortgage, making it harder to remortgage or sell until the price goes up again. It is a particular risk when buying a brand new home, as these tend to depreciate in the first few years.
Finding a mortgage in current market conditions
Mortgage rates have jumped as conflict with Iran has driven up inflation expectations and dashed hopes of interest rate cuts. If you need a mortgage because you are buying a home, or your current fixed rate deal is due to end, you should explore your options as soon as possible.
This is Money has a long-standing partnership with fee-free broker London & Country Mortgages (L&C) to provide expert mortgage advice. Prospective buyers can use the This is Money and L&C best mortgage rates calculator to show deals matching their home value, mortgage size, term, and fixed rate needs, or use L&C’s online Mortgage Finder to search thousands of deals from more than 90 different lenders.
The mortgage service is provided by London & Country Mortgages, which is authorised and regulated by the Financial Conduct Authority under registered number 143002. The FCA is the conduct regulator for financial services firms and financial markets in the UK, and it does not regulate most Buy to Let mortgages. Borrowing against a home carries risks, and your home or property may be repossessed if you do not keep up repayments on your mortgage.
