Habito 7 times the mortgage wage: why this is not a sign of the days before 2008
For personal finance journalists, the time between Christmas and New Years usually doesn’t offer particularly rich choices when it comes to news.
So it was truly surprising that online mortgage lender and broker Habito chose Boxing Day to announce that it was offer mortgages worth seven times a borrower’s salary.
It has caused quite a stir, with some pointing out that this is the first time since the financial crisis that such a heavily leveraged mortgage has become available.
Others, meanwhile, said making it easier to get a bigger mortgage would help drive up house prices.
A mortgage for seven times the salary offers the option of buying a larger house or saving a smaller deposit, but the number of people who will take out the Habito One loan is minimal.
Providing a higher loan-to-income ratio means that people with lower wages have an easier time qualifying for a mortgage. They can buy with a smaller deposit, or afford a larger or more expensive property.
Habito’s new product could increase the amount a single buyer earning £ 75,000 could afford to pay for a house over £ 200,000, for example.
However, they must agree to set their interest rate between 15 and 40 years – much longer than the standard of two to five years.
This is why Habito is able to justify lending them much more than the standard loan-to-income ratio of 4.5 times offered by most banks.
Scary stuff. Where is it?
I’ll start with a few words of warning for borrowers who are considering taking out one of these mortgages.
They should think very carefully about borrowing more than the average amount because their monthly mortgage payments will be higher and could be more difficult to cover if their financial situation changes.
Interest rates on Habito One products are also much higher than those currently available elsewhere, starting at 2.79%, and at £ 1,995 the arrangement fee is steep.
Habito One mortgage rates are higher than those available elsewhere. Borrowers will need to repair between 15 and 40 years, but can choose not to have a prepayment charge
In addition, fixing your mortgage over 15 to 40 years is a gamble. If you’ve been tempted by this mortgage, it’s pretty crucial that borrowers go for the no-charge prepayment option, even if the rates are slightly higher.
It’s impossible to predict what will happen with interest rates over 15 years, let alone their personal circumstances – and it will allow them to remortgage away from Habito without punitive fees if they need to.
Borrowers have something to think about.
But anyone to suggest that this heralds a return to financial crisis bridging lending, or that it will serve to push house prices up from their already high levels, is wrong in my opinion.
It was Money who asked Habito how many mortgages it would be able to grant on the basis of this criterion.
He told us his total loan pot for Habito One was £ 1bn. To put that into perspective, a total of £ 79 billion was loaned out in mortgages in the third quarter of 2021 alone, according to the Bank of England.
Based on the average UK new mortgage amount of £ 200,000, this would mean that around 5,000 households could get a Habito One mortgage.
But since they offer larger than average loans, the actual number will likely be even less, not more than a drop in the ocean of total mortgages.
And of these, the majority will always borrow the lower limit of 5 times their income – barely higher than the 4.5 times limit offered by most high street banks.
Indeed, the offer of 7 times the salary is only open to people exercising certain professions; mainly those in the public sector or requiring professional registration.
In other words, a very secure job with a fixed pay framework increases over time. And if they buy as a couple, only one person can borrow it, the other capped at 5 times.
Affordability checks banks must perform on mortgage borrowers are still tight
Whenever I write about low deposit or high leverage mortgages, comments pour in from readers warning of a return to bridging that has taken place in the run-up to the financial crisis.
They haven’t forgotten the pain this ultimately caused the owners, and rightly so.
In the past I have talked to mortgage prisoners who took out interest-only loans, sometimes with even more loans on top, and were not required to prove that they had a plan to pay off the mortgage at the end of the term.
Today’s borrowers are, on the whole, much smarter about taking on more debt than they can handle.
Today, in a changed world where they no longer pass the banks’ strict affordability checks and cannot move on to a repayment mortgage, they are unfortunately at risk of losing their home.
Whether or not borrowing seven times your salary is a good idea, what Habito One offers is still a long way from this type of loan.
There are other signs that the strict loan controls introduced in the wake of the financial crisis are easing – for example, the Bank of England is considering removal of the requirement borrowers to prove they can pay their lender’s standard variable rate plus 3% before they can get a mortgage.
If the policy is adopted, it could serve to raise house prices. But even if that happens, the checks borrowers must pass will still be much more stringent than they were before 2008.
Remember, this was the era of “self-certified” mortgages where they didn’t even need to prove they had income at all.
Borrowers today are, on the whole, much smarter about taking on more debt than they can handle, and I would be surprised if HabitO One’s offer of seven times the income was larger. .
At best, the ad is likely to pique the interest of borrowers who will end up taking its less-publicized products at five times their salary.
A nice publicity stunt for the lender, perfectly placed at a time when journalists around the world are scrambling for news.
But a sign that we are returning to the Wild West mortgage market before 2008? Not in my opinion.
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