New lender offers mortgages of six times income – is that a good idea?

A new mortgage lender is offering home buyers and homeowners the chance to borrow up to six times their annual salary.

April Mortgages, which launched its first products in April this year, says it will now lend up to six times annual income to eligible first-time buyers, home movers and people remortgaging.

It applies to both individual and joint mortgage applications. This means that two people earning a combined £75,000 could hypothetically borrow up to £450,000.

Most lenders offer the majority of borrowers a maximum of 4.5 times their income.  

April Mortgages says it will also give borrowers the chance to fix for up to 15 years and borrow up to 95 per cent of a property’s value.

This is similar to mortgage lender Perenna, which last year began lending up to 95 per cent of a property’s value, on fixed-rate terms of between 20 and 40 years and like April also will lend up to six times a borrower’s annual income.

James Pagan, director of product and portfolio management at April Mortgages argues that higher loan-to-income caps could support borrowers struggling in the face of continued house price growth.

He says: ‘Higher loan-to-income caps will mean April Mortgages can deliver peace of mind to far more borrowers across the UK, particularly those looking for help to secure their first, second or dream home.

‘Securing your rate for a period of five to 15 years makes it easier to budget, and removes the stress of having to deal with rate fluctuations every couple of years.

‘The loan-to-income cap improvements are the result of ongoing discussions with mortgage brokers, demonstrating our commitment to working closely with brokers and delivering the products and processes they and their clients most need.’

The six times income multiple will only apply to buyers and remortgagers who require a mortgage to cover no more than 85 per cent of a property’s value.

Anyone buying with a 5 per cent deposit for example will only be able to borrow up to a maximum of 5 times their annual salary, and those buying with a 10 per cent deposit will be restricted to 5.5 times their annual income.

However, the loan-to-income ratio is not impacted by the length of time someone fixes for. Whether someone fixes for five years or 15 years, there is the possibility to borrow up to six times their income, according to April Mortgages. 

What will the mortgage repayments be like?

The downside of April Mortgages is that, in exchange for the higher borrowing and longer fixes, customers will normally have to pay a higher rate than they would pay with many of its high street competitors. 

April’s cheapest five-year fix for those buying with bigger deposits of 25 per cent or more are 5.13 per cent. The same rates are available to those remortgaging with large amounts of equity.

Those buying with a 15 per cent deposit – the minimum required to borrow 6 times income – can secure a rate of 5.17 per cent if fixing for five years. This rises to 5.32 per cent on a 15 year fix.

Rates: April Mortgages is offering deals aimed at buyers as well as people remortgaging. Above are its current rates aimed at home buyers

The average five-year fixed rate mortgage is currently 5.41 per cent, according to rates monitor Moneyfacts.

However, while April’s rates are slightly better than the market average, it is comfortably beaten by a large number of lenders.

Nationwide Building Society is offering the lowest five-year fix for those buying with a 40 per cent deposit at 3.99 per cent.

And a handful of other lenders are offering just north of 4 per cent to fix for five years. For example, Barclays is charging 4.04 per cent and a £899 fee.

Max borrowing: Buyers and remortgagers will need to be buying or refinancing at a maximum loan-to-value of 85%

Someone with a £200,000 mortgage being repaid over 25 years would be paying £1,184 a month on April’s cheapest rate, compared to £1,060 with Barclays.

There are similar savings to be had for first-time buyers and those remortgaging when applying for the cheapest deals.

The gap narrows, however, at high loan to values. For example someone buying with a 15 per cent deposit, the lowest rate on the market is 4.5 per cent compared to 5.17 per cent with April Mortgages.

On a £200,000 mortgage being repaid over 25 years, that’s the difference between paying £1,112 a month and £1,189. 

While many home movers, first-time buyers and remortgagers will likely opt for cheaper options, those that need to borrow more in order to get the home they want may see it as an extra cost worth paying.

Mortgage interest rate that falls automatically

April Mortgages is also offering a rather novel feature, in that its customers will also benefit from their rate automatically reducing as their loan-to-value improves.

Loan-to-value is a measure of how much someone borrows on a mortgage compared to a property’s value.

If the value of a home rises with time, it also means the owner’s equity share in the property increases and therefore the loan-to-value falls.

For example, buying a property for £200,000 with a mortgage of £150,000 would equate to a 75 per cent loan-to-value, because the mortgage amount is equivalent to 75 per cent the value of your property.

Over time, after repaying some of the mortgage, the loan amount could fall to £140,000, meaning the new loan-to-value would be 70 per cent, if the property value remains the same.

Mortgage lenders will often provide cheaper rates for loans at 70 per cent loan-to-value than at 75 per cent loan-to-value, but with most lenders borrowers won’t benefit from this until the time comes to get a new mortgage deal.

At April Mortgages, however, if it has a cheaper rate available at 70 per cent loan-to-value than at 75 per cent on an equivalent product to the one that their customer is on, it will automatically switch their mortgage onto the lower rate.

In reality, it looks like the automatic interest rate change will make little difference given that April’s interest rates only change marginally between loan-to-value bands, if at all.

For example, its five-year fixed mortgage rate for someone buying at 80 per cent loan-to-value is 5.17 per cent. Someone buying at 75 per cent loan-to-value will get 5.13 per cent. But someone buying at 85 per cent loan-to-value will get the same 5.17 per cent rate.

How can you apply for an April mortgage?

Borrowers wanting to apply for an April mortgage can’t do so directly with the lender.

They will need to speak with one of the mortgage brokers it has partnered with.

This has recently expanded to include the likes of well known brokers such as SPF Private Clients and Coreco.

April’s find a broker tool shows which brokers are able to access its mortgages.

Are April Mortgages a good deal?

For those who feel that lenders’ maximum borrowing limits currently prohibit them from getting on the ladder, or buying the kind of home they want, April Mortgages could be worth considering.

The big question is whether they feel they can afford the monthly costs, particularly if they are borrowing at six times their annual income.

A debt-free couple each earning £40,000 a year might be able to borrow £480,000 at 6 times their annual income. 

A £480,000 mortgage at 5.17 per cent being repaid over 30 years will cost £2,627 a month.

However, two people on £40,000 a year will be taking home £2,693 each month after income tax and national insurance is deducted. 

Combined together that’s £5,386 after tax – and that’s before any pension contributions are included.

After paying the mortgage they will have £2,759 a month left between them.

For many people that will be too high a cost. However, for some it may seem like a price worth paying, particularly if their rent was of a similar level.

In reality, many first-time buyers won’t need to stretch themselves to six times their annual income, particularly those buying in more affordable parts of the country or who have a helping hand from parents with their deposit.

Currently, the average first-time buyer is borrowing at an average of 3.26 times their annual income, according to UK Finance.

Broker-only: April Mortgages can’t be accessed by approaching the lender directly

Mortgage brokers seem conflicted as to whether or not April Mortgages offer of six times income multiples is a big selling point.

Chris Sykes, technical diector at mortgage broker Private Finance says: ‘There are a number of lenders that can do six times income. Many just don’t openly advertise it. 

‘It is actually pretty rare for borrowers to be able to borrow six times their annual income amount, as the payments start to get silly and it ends up not actually being affordable in the current rate environment.

‘It is obviously more dangerous to stretch yourself on a mortgage. Just because you can, does not mean that you should.

‘Borrowers need to first consider if they would be better off buying a lower-priced home or saving up a bigger deposit.’

Justin Moy, managing director at broker EHF Mortgages told the news agency, Newspage: ‘Extending the amount people can borrow can come with its own dangers, especially where the perils of higher rates can compound the pressure on borrowers. 

‘But when income stretch is coupled with the security of longer term rates, as it is with April Mortgages, it becomes the perfect low risk model for homeowners.

Darryl Dhoffer, mortgage broker at The Mortgage Expert adds: ‘April Mortgages are the new sheriff in town. What they’re doing does feel like a shot in the arm for the industry. 

‘However, longer term fixed rates and increased affordability really do depend on borrowers’ circumstances and risk tolerance. 

‘Some may like the comfort blanket of longer term fixed rates for peace of mind, while others prefer the flexibility and potentially lower cost of a shorter fix. 

‘My questions and potential concerns would surround any changes in borrowers’ circumstances, and the ability to remortgage to other providers. 

‘This may not be optional if borrowing is maxed out to almost six times gross earnings, less commitments, and will incur penalties unless you’re moving home, some hefty ones as well, especially if you are on a 15-year fixed rate.’