Halifax and Lloyds Increase Mortgage to Salary Ratio

Halifax and Lloyds, two of the UK’s largest mortgage lenders, have recently announced a significant change to their mortgage lending criteria, allowing prospective homeowners to borrow up to 5.5 times their annual income. This marks an increase from the previous limit of 4.49 times income and will have a substantial impact on first-time buyers looking to enter the housing market.

 

The Mortgage to Salary Ratio

The mortgage to salary ratio is a critical factor that determines how much a lender is willing to lend a borrower based on their income. This ratio essentially sets the upper limit on the amount of money that can be borrowed. Most lenders in the UK have limited this ratio to around 4 to 4.5 times the applicant’s annual income. For example, under the previous rule, someone earning £30,000 a year could expect to borrow up to £135,000. However, with the new 5.5 times income rule introduced by Halifax and Lloyds, the same individual could now secure a mortgage of up to £165,000, significantly increasing their purchasing power in the housing market.

The Mortgage to Salary ratio also helps borrowers work out how much they can afford, this can vary depending on location and other factors.

 

Impact on First-Time Buyers

This policy change is particularly beneficial for first-time buyers, who often struggle to secure a mortgage large enough to purchase a home, especially in high-demand areas where property prices are steep. With the new ratio, first-time buyers will have a better chance of entering the property market. This is a crucial development, considering the rapid increase in house prices over the past two decades.

 

House Prices vs. Earnings

Lloyds data shows that since the year 2000, house prices in the UK have skyrocketed by approximately 240%.

This increase has far outpaced the growth in average earnings, which have only risen by around 112% during the same period. This disparity has made it increasingly difficult for many, particularly first-time buyers, to afford a home.

 

The Loan-to-Value (LTV) Requirement

However, it’s important to note that this increased lending ratio is typically only available for loans with a loan-to-value (LTV) ratio of 90% or less. The LTV ratio is the percentage of the property’s value that is being financed through a mortgage. For example, if you are purchasing a home worth £200,000 and have a deposit of £20,000, your mortgage would cover £180,000, resulting in an LTV of 90%. This means that to benefit from the new 5.5 times income policy, prospective buyers must have a deposit of at least 10% of the property’s value. This requirement ensures that the borrower has a significant stake in the property and reduces the lender’s risk.

 

Increased Lending Capacity

Lloyds has reported that this policy update will allow them to lend eligible customers up to 22% more than they previously could under the old policy. This increase is likely to be welcomed by buyers who are finding it increasingly difficult to keep up with the rising house prices. By enabling borrowers to access larger loans, Lloyds and Halifax are making it more feasible for buyers to purchase a home in today’s challenging market.

 

The Broader Implications

While this increase in the mortgage to salary ratio provides clear benefits to borrowers, it also has broader implications for the housing market and financial stability. On one hand, it could help stimulate the housing market by enabling more people to buy homes, potentially driving up demand. On the other hand, there is a risk that higher borrowing limits could contribute to further increases in house prices.

Higher borrowing could also lead to greater financial vulnerability for individuals if interest rates rise or if their financial circumstances change, making it harder to meet mortgage repayments. As such, while the policy is undoubtedly beneficial in the short term for those seeking to purchase a home, it also requires careful consideration of the long-term risks involved.