Home owners being restricted with loans based on future interest rates
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The amount of money banks and building societies are willing to lend to home owners is being based on future interest rate rises for the first time, it can be disclosed.
Lenders are so concerned about the likelihood that rates will rise they have placed extra restrictions on borrowers.
If the Bank of England raises interest rates from 0.5 per cent, which many analysts predict, lenders are likely to follow suit with their standard variable rates – the rate which borrowers automatically slip onto at the end of their initial deal.
Despite an average two year fixed rate mortgage being 4.75 per cent, some high street lenders are basing their affordability calculations on almost double this amount.
Some lenders suggested that when deals run out, borrowers could end up paying a SVR of 8 per cent or higher.
The extra restrictions mean a family with a household annual income of £60,000 may only be able afford to borrow the equivalent of one year’s salary instead of a more traditional three times multiple.
If the family wanted to borrow £150,000, it would cost them £855 a month at 4.75 per cent. But some lenders are refusing to offer them this much because the borrower’s monthly payments would rise to £1,157 if rates went to 8 per cent.
Instead, the lender agrees to lend just their annual salary of £60,000, which would cost £342 a month at a rate of 4.75 per cent and £463 a month at 8 per cent.
Banks and building society are also looking much more closely at typical household expenditure and taking into consideration bills such dental payments, gym membership and childcare costs before deciding how much money to lend. In this instance, the lender agrees to lend up to £500 a month.
It is the latest evidence of lenders tightening their criteria as they cherry-pick the most low risk borrowers.
Lenders have already been reserving the best deals for those borrowers with a large deposit of at least 40 per cent.
Joe Cohen, managing director of mortgage brokers First Action Finance said: “Lenders need to be more relaxed and use a lot more common sense in lending money to home owners.
“Households need more support from lenders amid the fragile economic recovery. And if this support is not forthcoming, there is a serious danger that it could jeopardize the recovery.”
Yorkshire Building Society confirmed it looks in depth at typical household expenditure and calculates how much a borrower can afford to borrow by using future interest rate forecasts.
Other British high street lenders use similar methods before approving a mortgage.
A spokesman for Yorkshire Building Society said: “Our lending policy is based on affordability rather than basic income multiples, considering individual borrowers’ circumstances and ensuring they have enough disposable income to meet their initial and future mortgage payments.”
A spokesman for the Council of Mortgage Lenders, said: “Lenders assess affordability in different ways. Some are taking the view that it is prudent and sensible to assess how affordability would be affected by a change of circumstances.”
Source: The Telegraph
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