Abbey offer: Groundbreaking or gimmick?

Analysis
By Julian Knight
Personal finance reporter, BBC News

The average cost of a home is nearly £200,000

Abbey's announcement that it will start offering mortgage loans of five times joint income has certainly grabbed people's attention.

But is this a genuine effort to help Britain's army of would-be first-time buyers onto the ladder, or just an example of irresponsible lending or a marketing gimmick?

Mortgages used to be so simple.

You would visit your bank or building society to prove your income and they would lend you a maximum of 3.5 times individual or three times joint salary.

The strict income multiple was an easy way for lenders to assess borrowers.

But in a country where the average house price is near £200,000, it does not take a maths genius to work out that sticking to such multiples means much of the population cannot get a sufficiently high mortgage to buy a property.

In reality this mortgage is aimed at second and third-time buyers Andrew Montlake, Cobalt Capital mortgage broker How hard is it to afford a house?

No wonder the days of cut-and-dried lending criteria have long gone.

"Over the past few years lenders have increasingly abandoned their old lending multiples," says Lisa Taylor, a spokeswoman for Moneyfacts, which collates information on financial products.

"Instead they have moved to looking at ability to pay, credit scoring applications and looking at incoming and outgoings."

Scratch beneath the surface of Abbey's offer of five times salary and you can see the same approach.

"Five times is only available to people who pass the credit scoring with flying colours," says Ms Taylor.

"Those that don't have an A1 credit score can expect to get somewhere around 3.6 times salary."

ABBEY MORTGAGE IN DETAIL Applicants must have a joint income in excess of £60,000 A standard deposit of 25% is required in order to qualify for five times income multiple A smaller deposit maybe allowed if the borrower has a high enough credit score Lower income multiples may be offered to people with smaller deposits Applicants will be credit checked and have their income and outgoings assessed

Abbey also puts its applicants through an affordability check, assessing outgoings and income.

First-time buyers

Abbey has said that the mortgage is designed, in part, to help first-time buyers onto the property ladder.

In short, the argument goes that rising house prices are forcing Abbey to abandon the old lending criteria.

However, the provision that borrowers should in the main have a 25% deposit will effectively shut the door on many first-time buyers.

"This product is not aimed at first-timers," says Andrew Montlake, director of mortgage broker Cobalt Capital.

"Do the sums. Someone borrowing £250,000 would have to have well over £60,000 in the bank to qualify.

"How many first-time buyers have this sort of cash? Very few indeed.

"In reality, this mortgage is aimed at second and third-time buyers - people who have already made money on property and want to move somewhere bigger."

HAVE YOUR SAY You should be able to borrow as much as you like - as long as you can pay it back Sue Harley-Mills, UK Send us your comments

The 25% deposit figure is not random. It is a standard industry benchmark.

"At 25%, the lender can be sure that if they have to repossess, they will get their money back at auction. For borrowers, the world is your oyster at 25%," says Mr Montlake.

"There is not much risk to Abbey in this. In addition, having such a large deposit affords some protection against negative equity for the borrower."

Abbey says it is being "cautious" and denies charges, already levelled by some debt charities, of irresponsible lending.

"Offering the potential for more money does not mean that we are simply laying it out for anyone," says Abbey spokesman David Stewart.

"Back in the 1980s, interest rates were 15% and lenders were offering three-times income.

"Interest rates are now a third of that level and we are offering five times salary - a more affordable scenario than back in the 1980s."

Higher multiples

Similar multiples are being offered by other lenders, but only on very specialist mortgages - the aim of this product is to be transparent David Stewart, Abbey

According to Mr Montlake, loans of five times salary or higher are hardly uncommon.

"Northern Rock and Scottish Widows will lend five times or close to five times income to young professionals," he says.

"There are even instances of seven-and-a-half times salary being lent to individuals who can clearly show that their income will rise markedly in the future, such as trainee accountants, doctors and solicitors."

Anyone observing the mortgage market in recent years knows that, if you go to see a broker, mortgage multiples well above the old norm are available.

However, Abbey is unique in the fact that it is the first lender that has publicly said it is willing to break with old-school lending income multiples - such as 3.5 times individual and three times joint salary.

Abbey said that its decision to publicise its five times salary offer brings more openness.

"Similar multiples are being offered by other lenders but only on very specialist mortgages - the aim of this product is to be transparent."

Abbey fightback

Abbey's move should be seen in the context not only of the wider mortgage market but its own business.

The lender's position in the mortgage market has taken a battering.

In December 2004, it suffered the humiliation - and in mortgage circles that is not too strong a word for it - of having to withdraw some mortgage products from sale because it was not sufficiently prepared for a new regulatory regime.

In the hiatus, Abbey lost some ground to its rivals.

By announcing that it has ditched lending criteria - which is more about popular perceptions than the recent market reality - Abbey is sending out a marketing message that it is open for business.

"There were bad periods... but we are ready with this offering to stand up and be counted," says Mr Stewart.

A "marketing ploy" in the words of the Building Society Association.