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Last Updated: Tuesday, 21 November 2006, 11:03 GMT
Co-op offers five times mortgages
Co-operative bank advert
The Co-operative bank advertises its new deal
The Co-operative Bank has become the latest mortgage lender to offer loans that are calculated at up to five times a customer's income.

At the beginning of November the Abbey, the country's second largest lender, attracted widespread attention for a similar deal.

The Co-op said it was stretching its lending criteria so borrowers could keep up with rising house prices.

It said the offer was aimed at people with stable jobs and incomes.

Stable jobs

The bank's chief spokesman Russ Brady, said: "It reflects people trying to get on the housing ladder and trying to match house price costs."

If you begin to see a persistent and long term decline in first-time buyers it affects the market further up
Council of Mortgage Lenders

"But not everyone who applies will get five times their salary," he warned.

The bank says it will scrutinise each applicant's ability to repay the loan, and take into account future interest rate rises, before letting them borrow up to the new higher limits.

Until recently, the Co-op bank offered mortgages at more traditional multiples of incomes, such as two and a half times a joint salary, or three or four times a single one.

Growing trend

For several years now many lenders have adopted a more sophisticated approach to lending mortgages.

Instead of just relying on a crude multiple of income, many lenders have looked at an applicant's other debts, disposable income and payment record before coming to a decision.

The recent era of low interest rates has also made it much easier to lend at larger multiples.

Since the Abbey made its announcement, the Yorkshire building society and Bank of Ireland have also announced similar deals for selected borrowers.

There are now 13 lenders who will lend at four and a half times a single income, or more.

The most generous is the Darlington building society whose "income stretch" mortgage potentially goes to six times a borrower's earnings.

However, that era of low interest rates may be coming to an end.

The Bank of England has recently increased the base rate to 5%, and warned borrowers that they should not count on low inflation and low interest rates staying forever.

Priced out?

With house prices nearly tripling in the past decade, and far outstripping the rise in wages and salaries over the same period, there has been widespread concern that many would-be buyers have been priced out of the market.

Statistics from the Council of Mortgage Lenders show that first-time buyers currently make up 36% of all house buyers.

That is a significantly smaller proportion than in the 1990s when each year they accounted for between 45% and 55% of the total market.

Other evidence points to the fact that any first-time buyers now rely heavily on their parents to give them substantial amounts of money to finance their first house purchase.

Despite this, lenders are worried that a lack of affordability will be a drag on the market.

"If you begin to see a persistent and long term decline in first-time buyers it affects the market further up," said Bernard Clarke of the CML.

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