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Has the Bank of England just made it easier to get a bigger mortgage?

More people could borrow more money to buy a house after some technical tweaking to responsible lending regulations.

It could be easier to get a mortgage at more than four times your salary after the Bank of England tweaked some obscure lending rules.

How much can you normally borrow?

Mortgages are traditionally only available at up to four times a borrower’s income. So if you earned £25,000, you could borrow up to £100,000. It is possible to get mortgages of more than four times your income, but these are harder to come by.

Borrowing with a partner

If you are borrowing with a partner your incomes are usually combined one of two ways:

  1. Add the lowest income on top of the highest after it has been multiplied. So if the highest income was £25,000 and the lowest was £20,000, the offer could be £120,000 (£25,000 x 4 + £20,000 = £120,000).
  2. Add both incomes together and use a lower multiplier figure. So for the same incomes this could result in an offer of £135,000 (£25,000 + £20,000 x 3 = £135,000).

Lenders tend to use whichever method results in the bigger loan amount.

What has the Bank of England changed?

The change is relatively obscure and technical, but as it comes into effect immediately we should see some real world implications pretty soon.

Last week, the Bank of England’s (BoE) Prudential Regulation Authority (PRA), the body responsible for regulating lending to ensure banks act responsibly, tweaked the rule about how many mortgages over four times a borrower’s income a lender is allowed to offer each year.

Back in 2014, the PRA decided that banks could only make 15% of all the mortgages at more than 4.5 times a borrower’s salary.

This 15% cap was for each quarter, but because it can take more than the three months in a quarter for a borrower to complete a mortgage application, banks ended up effectively restricting mortgages with a high loan-to-income ratio to around 13% of all mortgages offered.

The PRA has now changed the cap to be 15% of all mortgages over a whole year. So lenders no longer need to try and hedge their risk by estimating when borrowers with a high loan-to-income ratio will complete an application.

This doesn’t sound like a big change, but it’s estimated that banks will now be able to offer around 10% more borrowers a mortgage in excess of 4.5 times their income.

Could you get a bigger mortgage?

Normal affordability criteria and financial stress checks still apply to any new mortgage you apply for. It’s up to a individual lenders to decide whether you could handle a mortgage more than four times your income.

After the Mortgage Market Review concluded in 2014, outgoings are taken into account, as well as income, when determining whether you can afford a mortgage.

Outgoings tend to be fixed regular and ‘unavoidable’ costs (in essence costs you can’t quickly reduce on an ad-hoc basis), so include things like:

  • Existing monthly repayments for loans and credit cards
  • Childcare costs (or maintenance payments)
  • Car tax and insurance
  • Council tax and utility bills for the home you want to buy
  • Insurance payments

Also, while as a rule you’ll also need at least a 5% deposit to get any mortgage, if you want a mortgage of more than four times your income you’ll likely need a larger upfront deposit. At least 25% is normally accepted as a responsible deposit, but the best deals on the market are typically only available to those with at least a 40% deposit.

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Should there be bigger mortgages?

Making it possible for people to borrow more money can be a double edged sword.

On the one hand, house prices have risen consistently over the past few decades to levels well beyond the reach of first time buyers in many parts of the country.

But on the other hand, private debt in the UK has just surpassed pre-2008 financial crash levels, and these high debt levels bring risks that both banks and individuals might overstretch themselves again as happened in 2008.