A mortgage lender is now offering households the chance to borrow up to seven times their income on its long-term home loans – but experts have urged people to do their research before committing, with one saying it could be a “recipe for disaster.”
April Mortgages, which specialises in long-term fixed-rate products, will offer the option to some borrowers as long as they have a household income of over £50,000.
Most mortgage lenders will only lend around four-and-a-half to five times their household income to borrowers, although some do stretch further than this.
The limits are put in place to ensure people can afford to make their repayments, especially if rates rise, but one of the reasons April Mortgages can offer higher borrowing amounts is because it fixes its rates for long periods of time.
It says the option can “help clients with strong earnings but limited borrowing options” but mortgage brokers have said taking up the offer could be “dangerous” for some customers.
Here’s how the deal works, and what experts say you need to look out for.
April Mortgages is offering the deal for customers who are willing to fix their mortgage rate for 10 or 15 years.
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The increased borrowing is available to applicants with a household income of £50,000 or more, as long as you have a deposit or equity of at least 15 per cent.
It says you can generally borrow up to £1m, with exceptions considered on a case-by-case basis up to £2m. You can have a mortgage term of up to 40 years.
April Mortgages stresses that borrowers will be able to borrow up to seven times their income as a maximum – with the exact value depending on circumstances.
There are no early repayment charges (ERCs) when borrowers move home or repay from their own funds, there are uncapped overpayments, and automatic rate reductions as borrowers pay down capital and reduce their loan-to-value ratio.
The rates on its loans are far above the cheapest on the market, for example, it offers a fixed rate of 5.40 per cent on its 10-year fix, if you have a 25 per cent deposit, while rates of just over 4 per cent are available from bigger lenders on shorter fixes.
In theory, if someone on £50,000 wanted to, they could take out a £350,000 mortgage. Assuming a 5.4 per cent interest rate, then on a 40-year term, that would cost £1,782 per month.
That person would only get £3,289 per month take home pay – assuming they pay 5 per cent into a pension and do not have a student loan – and so they could end up paying more than half their take-home income towards their mortgage.
If they took out the deal on a 40-year term and completed it at that 5.4 per cent rate, they would also end up paying £505,558 in interest, in addition to the £350,000, over the life of the mortgage.
However, many people who take out long-term mortgages intend to shorten the term in the future.
Mortgage could be ‘dangerous’ according to brokers
Some mortgage brokers have said that taking out a loan worth seven times your income has serious downsides.
Lewis Shaw, of Shaw Financial Services, said borrowing seven times your income could be “a recipe for disaster”.
He said that someone taking out one of these mortgages could end up paying more than half their disposable income on their mortgage.
“One period of ill-health and things will start to unravel very quickly,” he said.
Nick Mendes, of John Charcol brokers, said: “One of the main risks with borrowing at six or seven times income is that it leaves very little flexibility. Home ownership comes with a range of additional costs beyond the mortgage itself, such as maintenance, insurance and unexpected repairs. If a large proportion of take-home pay is already tied up in repayments, there may not be much headroom for the unexpected.
“It is crucial buyers build in breathing space within their budget, rather than stretching to the maximum they are offered. Leaving room for savings, pension contributions and a financial buffer for emergencies is essential for long-term security and peace of mind.”
Brokers also said that borrowers would likely have to take on long-term deals to be able to afford that amount of borrowing they take on.
A longer mortgage term means lower monthly repayments, but paying more in interest over the long term.
“Taking out a larger loan over an extended term, such as 35 or 40 years, may make monthly payments seem more manageable, but it means paying significantly more interest over the lifetime of the mortgage. Buyers should weigh up the true long-term cost, not just the immediate affordability,” Mr Mendes said.
Could it be an option for some people?
James Pagan, director of product, portfolio & operation, longer-term fixed rate lender April Mortgages, said: “Longer-term lending offers clients the stability of predictable payments and peace of mind – but we’ve gone a step further by removing the usual compromises.
“Our products combine the certainty of a fixed rate with the freedom to move or repay early without penalties, and rates that automatically reduce as the loan-to-value improves.”
Shaw said that for some borrowers, who were guaranteed to see their income grow in the future, this sort of deal could be something they might consider.
“If someone’s income is likely to rise quite quickly over a five-year period, such as a newly qualified lawyer, this could make sense. Outside of that I think it could be dangerous,” he said.
But Mendes said: “If income does not rise significantly over time, or if personal circumstances change, it may become harder to remortgage or move home later on. Passing new affordability tests could prove more difficult, particularly if lending criteria tighten.”
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