Homebuyers can now borrow 7 times their salary with Habito
A mortgage lender now allows homebuyers to borrow seven times their salary in order to âsecure their dream home soonerâ – but there are several pitfalls.
Mortgage market disruptor Habito has changed the terms of its Habito One product to allow certain types of borrowers a much higher loan-to-income ratio.
Typically, banks allow loans of up to 4.5 times the combined salary of applicants.
There is another problem with Habito’s mortgage: borrowers must agree to set their interest rate for the life of the mortgage; between 15 and 40 years old.
Habito says being able to borrow 7 times their income could allow homebuyers to buy a larger home sooner than they might otherwise – but there are pitfalls
Habito’s seven times income offer is only available to applicants in the following professions: firefighters; police officers; NHS doctors, nurses and paramedics; teachers in the public sector; accountants; lawyers; lawyers; civil engineers; dentists; architects; surveyors and veterinarians.
They must be qualified, practicing and registered with the appropriate industry body.
It will also accept applications where at least one borrower earns a salary of Â£ 75,000 or more in any profession.
In joint applications, a single borrower will be able to borrow 7 times their salary, even if both are in a qualifying profession or earn more than Â£ 75,000. The other can borrow up to 5 times his salary.
Unlike Habito’s long-term fixed rates, borrowers typically only fix their rate for two or five years, after which they can remortgage on another product.
Applicants who do not meet the criteria can still get a Habito One mortgage with a fixed rate for the entire term, but will only be able to borrow up to 5 times their salary.
All Habito One products come with a hefty product fee of Â£ 1,995, although this can be added to the loan.
What are the rates, and is a long-term fixed rate a good idea?
Rates on Habito One products start at 2.79 percent, if the buyer has a 40 percent deposit, takes out the 15-year mortgage, and agrees to pay a prepayment charge (ERC ) if he later decides to remortgage or prepay the loan.
Without ERC, the cheapest rate is 2.99 percent.
For those with lower deposits, the rates are much higher. A borrower with a 10 percent deposit and a maximum term of 40 years, with no prepayment charge, would pay 5.60 percent.
The cheapest rate available elsewhere on a standard two-year fixed mortgage with borrowing up to 4.5 income is much lower.
The rates available on Habito One mortgages are above the market average
Right now, a borrower with a 40% deposit could get a rate of just 1.11% with Barclays, with a fee of Â£ 999.
Even if they only had a 10% deposit, they could get a rate of 1.61% with a fee of Â£ 1,249 with Platform.
According to the latest data from Moneyfacts, the typical rate of a two-year fix for someone with a 10% deposit is now 2.51%, well below the 3.79% of December 2020, and even lower than that of December 2020. before the pandemic.
Whether setting a long term mortgage rate is a good idea depends on the rate offered and where the borrower thinks the rates will go in the long term.
Although still very low in historical terms, interest rates are rising slightly after months of sustained decline.
Indeed, the Bank of England raised its base rate from 0.1% to 0.25% this month.
It is expected to rise further in 2022, with some estimates suggesting it could reach 0.50% during the year.
If the base rate, and therefore mortgage rates, were to rise much more substantially than this over time, then setting Habito rates for life might start to make sense.
In October, the OBR warned of a worst-case scenario in which a âwage spiralâ or energy price shock would cause the base rate to rise to 3.5% in 2023.
If this extreme scenario were to come true, a lifetime mortgage on one of the Habito One rates would start to look like a better deal.
Habito One customers could get out of the mortgage at any time if they saw a better deal elsewhere, but only if they had chosen the option without ERC.
Is borrowing 7 times your income reasonable?
Providing a higher loan-to-income ratio means that people with lower wages have an easier time qualifying for a mortgage and allows borrowers to afford a larger or more expensive property than is otherwise possible.
This could potentially mean that they could avoid buying a smaller “starter house” and move directly to owning a larger family home to stay there for the long term, Habito said.
However, borrowers should carefully consider the idea of ââborrowing more than the average amount, as their monthly mortgage payments will be higher and could be more difficult to cover if their financial situation changes.
Critical workers to whom Habito offers additional loans may be less likely to lose their jobs, but they still need to make sure they can comfortably pay their monthly payments.
NHS workers are one of the groups that will be eligible for Habito’s new mortgage offer
Typically, lenders advance borrowers a maximum of 4.5 times their salary. They may choose to offer some borrowers a little more, often up to 5.5 times, but Bank of England rules strictly limit the number of loans they can make on these terms.
Habito One mortgage applicants borrowing 7 times their income will also need to have the equivalent of 10 percent of the borrowed amount in cash once they have paid their down payment.
They will need to earn at least Â£ 25,000 per year, have a good credit rating and have been employed full time for at least a year, as opposed to the industry standard of 3 months.
Habito says these additional requirements will ensure that customers borrow “safely”.
Daniel Hegarty, Founder and CEO of Habito, said: âWe think this will be particularly attractive to those who want to buy a home with a lot of future potential, or to people who expect salary increases in the near future. their careers, because Habito One allows you to choose to make unlimited overpayments to get out of the mortgage faster. ‘
Being able to borrow only 4.5 times their salary often means that buyers have to save substantial deposits to afford housing, especially in areas with high house prices.
First-time buyers have been forced to find, on average, an additional Â£ 23,000 to buy a house since the start of the pandemic, according to Aldermore Bank, due to soaring house prices.
Are similar offers available elsewhere?
Banks can offer some mortgages for more than 4.5 times their salary, but the number they can grant is strictly limited due to the risks involved.
The Bank of England had considered increasing the proportion of large mortgages that mortgage lenders can offer to people who need to borrow more than 4.5 times their salary, but recently rejected the idea.
Some banks independently adjust their loan-to-income ratios, but they should only do so within the framework of existing rules.
For example, Nationwide increased its maximum loan-to-income ratio to 5.5 earlier in 2021, although it could only offer the deal to around 5,000 households per year.
The amount Habito can lend on its Habito One mortgages is capped at Â£ 1 billion.
With a typical mortgage amount of around Â£ 200,000 this would again mean that around 5,000 households could benefit.
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