Nationwide Building Society is now allowing homeowners to borrow up to 6.5 times their annual income as a mortgage, up from 4.49 times.
The increased limit is available to those looking to remortgage without taking any additional borrowing, on loans covering up to 90 per cent of a property’s value.
However, it won’t be available to those looking to change the mortgage amount.
This means it could help those who have seen their household income drop since they took out their last mortgage – meaning they might not otherwise be able to qualify for a new deal.
Big jump: Nationwide is increasing the maximum loan-to-income it will accept to 6.5 times, for remortgage applications that don’t require any additional borrowing
This could include couples where one partner has stopped work for reasons such as childcare, redundancy or retirement, or has switched from being employed to self-employed.
Nationwide also says the extra borrowing could be a ‘lifeline’ for mortgage prisoners, although those with a poor credit history are unlikely to qualify.
Since 2014, banks have been subject to regulatory limits on the number of mortgages they can offer where someone is borrowing more than 4.5 times their salary.
This means most lenders refrain from offering mortgages of more than 4.5 to 5 times the annual income of those applying.
Nationwide’s relaxation of this affordability cap has the potential to greatly increase homeowners’ potential borrowing capability.
For example, a borrower on a £50,000 annual income would now be able to borrow up to £325,000, compared to £237,500 at 4.75 times income.
A few other lenders are prepared to stretch mortgages to beyond 5 times income, but these are typically reserved for high earners.
For example, HSBC allows people to borrow up to 5.5 times their income but only those earning £100,000 or more. Halifax also allows borrowing of up to 5.5 times income, but only where the annual income is £75,000 or more.
Nationwide’s new income multiple has no such hurdles, meaning it will benefit borrowers who have reduced incomes and would otherwise be unable to remortgage to a new deal based on most lenders affordability caps.
Henry Jordan, director of mortgages at Nationwide Building Society said: ‘By increasing the maximum loan-to-income, we are giving people who don’t need any additional borrowing more opportunity to change lender and save money, and potentially helping those mortgage prisoners who have been unable to remortgage to a better deal until now.
David Hollingworth, associate director at mortgage broker, L&C Mortgages added: ‘Those borrowing on a like-for-like basis will have a clear track record of meeting their payments and will feel that they should be able to take advantage of better deals by switching lender.
‘It’s therefore good to see lenders thinking about how they can provide more flexible solutions to the right target groups.’
Who will this help?
This change from Nationwide could provide a lifeline to some borrowers, particularly those whose income may have decreased since taking out their initial mortgage loan.
This could be anyone whose income has reduced, perhaps due to the pandemic, a change in career, redundancy or childcare.
It could also benefit mortgage prisoners who, despite keeping up with their monthly repayments, are struggling to meet the current affordability criteria to qualify for a new mortgage.
Mortgage prisoners are people who are trapped with their current mortgage lender and unable to switch to a new deal, often due to a change in their income or not meeting stricter affordability rules.
With their initial deal having finished, they will have fallen on to their lender’s standard variable rate and consequently will be paying more. The average standard variable rate is 4.34 per cent according to L&C Mortgages.
Mortgage prisoners: Nationwide’s move may help some people who are currently stuck on their lender’s standard variable rate and unable to switch to a new mortgage
Chris Sykes, a mortgage consultant at Private Finance said: ‘This is a very welcome change and could be a lifeline to some borrowers who are either mortgage prisoners or had a recent significant reduction in income.
‘For example, someone who was made redundant and who doesn’t yet have that previous level of earnings, someone who got a mortgage on an employed income but has now gone self-employed and not yet earning enough to justify the same mortgage.’
However, whilst the loan-to-income ratio is important, it’s worth noting that any fixed outgoings, including other loans, could be deducted from your overall income, reducing your maximum borrowing capability.
Borrowers must also prove they can still afford their mortgage repayments if these were to increase to 3 per cent above their lender’s standard variable rate.
Those with poor credit ratings are also unlikely to qualify for the extra borrowing.
‘This is all stress tested on affordability,’ says Sykes, ‘so a lender wouldn’t give this 6.5 times income if it wasn’t affordable.
‘However, like-for-like remortgages can often be stressed at a slightly lower rate though as there is evidence that they can pay that amount.
‘So this is a product that could really help mortgage prisoners.’
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