Abbey’s revelation last week that it will offer mortgages at up to five times a borrower’s salary has led to warnings that the move could saddle house-buyers with huge and unpayable debts.
But it also brings the issue of innovation in the mortgage market into sharp relief. Abbey’s move comes as lenders search for persuasive ways to attract customers and keep the market buoyant. Some predict rivals will follow Abbey’s lead and a war over lending multiples will break out between the major lenders.
Abbey is offering individuals or couples with a salary of over £60,000 loans of up to five times that sum across all its mortgage products. This is far greater than the industry standard of three-and-a-half times earnings.
However, there is confusion at the bank about the size of deposit required for such mortgages. One press officer had claimed a 25% cash down payment was needed but another says this was a mistake and in some cases a deposit of just 3% of the purchase price would be necessary.
This has stoked fears that Abbey’s move heralds a return to the boom and bust days of the early 1990s and critics accuse Abbey of promoting irresponsible lending to boost market share.
Going Against the Tide
Jo Parker, managing director of financial services specialist Teamspirit, believes the decision flies in the face of the industry’s move towards responsible lending.
“The new move by Abbey reflects badly on its brand and is a backward step,” she says.
“Similar mortgage multiples were being offered 15 years ago just before the housing market crash when so many people fell into arrears as interest rates went up.
“Since then, the industry has seemed to do everything it can to avoid irresponsible lending and so Abbey’s move is a huge step backwards and not forwards.”
She says the move may well increase mortgage sales in the short-term but does nothing for the reputation of the Abbey brand and more importantly, the financial services industry. “It also falls well short of the Financial Services Authority focus on treating customers fairly,” she adds.
Especially so, she says, as predictions are that interest rates are about to go up – leading other mortgage lenders to withdraw their fixed rate mortgages in the same week that Abbey made this step.
An Abbey spokesman defends the move against criticisms of irresponsible lending. “We think of first-time buyers as youngsters but in actual fact the average age is rising. Therefore to meet the criteria to get five times combined income is not that unfeasible,” he says.
He adds: “A lot of fuss has been made that people are more likely to get into debt but I can’t stress enough that although we are potentially lending more we have a very good affordability model in place.”
At the same time, cchm:ping joint managing director Paul Gordon believes Abbey’s might in the sector – it is the second biggest lender by market share – will encourage others to follow suit.
“You can’t afford to stand on the sidelines if the major brands are innovating,” he predicts.
The impression that Abbey could be tempting first-time buyers to borrow beyond their means was furthered by a report last week from accountancy firm PricewaterhouseCoopers, warning there is a one in three chance that house prices will have fallen by 2010.
However, average property prices grew by around 7.7% during the second quarter of 2006 compared to the same period last year, bolstering the view that a long expected bust in the housing boom will fail to materialise.
It is no surprise, then, that banks and mortgage providers are looking for increasingly innovative ways to keep buyers buying, says Gordon.
“For years mortgages were quite ‘vanilla’,” says Gordon. “But in the past five years there has been a huge amount of consumer activity and new product development.”
The Santander-owned bank is not alone in its move to offer such high multiples to borrowers which is an indication of how overstretched the housing market is, say experts.
It is only four years since a number of lenders broke from the traditional two-and-a-half times income multiple for joint salaries.
Meanwhile, the popularity of self-certification mortgages, once only an option for the self-employed, has waned as campaigners have pointed to abuses inherent in the system Bank of Ireland and Bristol & West have already relaxed their lending criteria, though not as far as Abbey. Meanwhile, Yorkshire Building Society launched a five-times income mortgage product earlier this year.
HBOS, the UK’s biggest lender, is to start offering mortgages that could allow buyers to borrow up to about 125% of the value of their home. This would be similar to Northern Rock’s “Together” mortgage, which allows people to borrow up to 125% of the property value and is understood to bring in about £8bn of new business each year.
Higher loan-to-income multiples increase risks for borrowers, with an ever larger proportion of take-home pay swallowed up by monthly mortgage payments.
Interest Own Goal
Darren Cook, head of mortgage research at Moneyfacts.com points out that to achieve the five times earnings on Abbey’s new range, applicants will need a near-perfect credit score: “This is unlikely to apply to an indebted first-time buyer,” he says. He believes Abbey has scored an own goal by introducing the offer in the week before the latest announcement on interest rates from the Bank of England.
He adds: “Abbey’s launch could be seen against concerns about its declining market share.” The bank looks set to lose its number two position in the market following the likely merger of Nationwide with Portman.
HBOS, which owns the Halifax brand and special mortgage lender BM Solutions, controls 20.8% of the market in terms of the value of its mortgage book. Abbey has 9.7% of the market, while Nationwide, at 9.3%, would leapfrog it if Portman’s 1.4% share was added to it.
Gordon believes it has been a strategy for Abbey to regain its status as a leading mortgage provider since Santander bought it in 2004. The first advertising campaign launched under the “Santander flame” rebrand was for mortgage products in May 2005.
He says: “While it appears to be new and exciting and putting Abbey at the heart of activity in new product development, the caveats mean it is only going to be viable for a handful of people: it is not the best thing since sliced bread.”
Instead, he points to offset and interest-only mortgages as more indicative of where the market should be looking.
Simply increasing the income multiple seems far from innovative. But lenders need to lure people to spend more in the housing market to ensure it keeps growing.
Whether Abbey’s move leads to a rush of irresponsible lending or not, those struggling to gain a foot on the property ladder will find it yet harder with new money pouring in leading to further house price inflation.