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Last Updated: Wednesday, 1 November 2006, 15:06 GMT
More fuel for a booming market
By Ian Pollock
Personal finance reporter, BBC News

Abbey, the country's second biggest mortgage lender, is making a clear play to attract more customers, especially first-time buyers.

Financial Times headline, December 2004
The Bank of England keeps a close eye on mortgage lending

By offering its most credit worthy customers as much as five times their incomes as a home loan, it hopes to bring in a lot of business.

Citing the current era of low interest rates and high house prices, Abbey says it is "sensible" to offer bigger loans than before.

"We are making sure we are not just handing out the money and getting people into debt they cannot afford," says Abbey's David Stewart.

If you cannot get together a suitably large deposit then the bank will lend you less.

'Small number'

Will all this set a new trend in the mortgage market, with five times mortgages becoming common place?

Lenders are trying to devise ways of dealing with the fact that house prices have been rising much faster than peoples' incomes
Bernard Clarke, CML

Bernard Clarke of the Council of Mortgage Lenders (CML) doubts it.

He points out it will not even be a standard offer for Abbey's own customers.

"Only a very small number of them will be able to qualify," he says.

However, the bank's move reflects a wider problem for mortgage lenders.

"What we are seeing are lenders trying to devise ways of dealing with the fact that house prices have been rising much faster than peoples' incomes," says Mr Clarke.

Competitive pressure

If Abbey is successful in grabbing a larger slice of the new mortgage market, then other experts argue that rival lenders may copy its example.

"If the other lenders find they are losing market share to the Abbey over the next six-to-nine months, other lenders may follow suit" says Ed Stansfield at Capital Economics.

In fact, lenders have become steadily more generous over the last few years.

"Actual borrowing multiples have been rising for some time," says Milan Katri, chief economist at the Royal Institution of Chartered Surveyors.

"The economy has been more stable and interest rates have moved in a very narrow band, so they have been happy to lend more generously," he adds.

Abbey's more generous lending stance is not unique.

Northern Rock, the UK's fifth biggest mortgage lender, has been lending at this sort of multiple for a year now.

In fact there are more than 60 mortgage deals, available from different lenders, that offer more than the usual 3.5 times mortgage.

And a few will even offer some customers as much as 7.5 times their incomes.

Economy fears

No matter how carefully the lenders may calibrate their lending, the plain fact is that by lending at more generous multiples, more people will borrow more money than would have been the case before.

There's a lot of fear in the minds of first-time buyers who see property apparently rising out of their grasp
Saxon Brettell, Cambridge Econometrics

So what?

According to Saxon Brettell, a property market specialist at the leading consultancy Cambridge Econometrics, this will matter if things go wrong with the economy.

"There's a lot of fear in the minds of first-time buyers who see property apparently rising out of their grasp," he says.

"But if things do turn sour suddenly what will go first is the housing market."

Tax relief

The last boom-and-bust in the property market happened at the end of the 1980s and in the early 90s.

Nigel Lawson, Tory Chancellor in 1988.
Chancellor Nigel Lawson helped inflate the 1980s house price boom

The 80s house price boom had been going on for several years when it was given one final push.

The then Chancellor of the Exchequer, Nigel Lawson, used a budget speech to announce the end - in less than five months time - of double mortgage interest tax relief.

At the time, that was a major subsidy to mortgage holders.

Tens of thousands of people piled into the market in a desperate attempt to get onto the property ladder before - as they saw it - it was pulled out of their grasp forever.

But with general inflation soaring, the government nearly doubled interest rates from just over 7% in the spring of 1988 to nearly 15% in October a year later.

The results were crippling to millions of people - a recession, a crash in house prices and hundreds of thousands of home owners losing their jobs and seeing their homes repossessed because they could not keep up with repayments.

Booming market

Of course, 2006 is not 1988 revisited.

General inflation and interest rates are much lower and have been for the past decade or so.

Abbey's move will probably not pour fuel on the fire of a booming property market in the way that Chancellor Lawson did.

But next week the Bank of England is widely expected to raise interest rates again to 5% because it is worried about inflation taking off.

If rates go even higher, then the appetite of borrowers to take on more debt might wane considerably.

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