Banks are tearing up the rules limiting the amounts homebuyers can borrow and encouraging them to take on enormous mortgages.
A young working couple without children and on an average wage can now borrow close to £245,000 - 80 per cent more than in the past.
The figure amounts to a staggering 5.41 times their joint gross income of £45,248. The change to home loan rules means that almost all homebuyers will be able to borrow more. But critics have warned the deals could encourage borrowers to take on dangerous levels of debt.
Banks and building societies are offering the 'mega-mortgages' as they battle for business in a cooling market.
This has already seen a raft of loans equivalent to 100 per cent of a property price, with some going as far as 125 per cent.
But the biggest change involves a shift away from the traditional system of basing home loans on a multiple of the buyer's income.
'Affordability tests'
Instead lenders are switching to an 'affordability test', in which most buyers will qualify for much bigger loans after an assessment of their income, debts and spending patterns. The shift flies in the face of warnings from the City watchdog, the Financial Services Authority, and the Bank of England.
The FSA has argued that a maximum home loan of three times a single person's salary and twice a couple's joint income is prudent.
Many lenders have already stretched this to four times for a single buyer and three for a couple. However, the new regime allows much more. It looks at the amount of spare cash available each month, after food, bills, other essentials and debt repayments, before deciding the maximum loan possible.
Keith Tondeur, of the debt advice charity, Credit Action, was worried.
"The potential harm is huge. This is secured lending at a big level, which means people's homes are at stake," he said.
"If there is a wobble in house prices, and the economy slows leading to rising unemployment, what are people with these huge home loans going to do? These sorts of loans enable people to get on to the housing ladder, but you have to look at the cost. These loans risk tempting people to over-commit."
A study by the Alliance & Leicester denies the new system is reckless.
Director of mortgages, Stephen Leonard, said: "Affordability provides a more responsible approach."
|
