Halifax is offering first-time homebuyers bigger mortgages of up to 5.5 times income – is it a good idea?

First-time buyers will now be able to take out larger mortgages when applying through Halifax.

The mortgage lender today announced it will make £2 billion available to first-time buyers who need to borrow up to 5.5 times their annual income.

To be eligible for what Halifax calls its “first-time buyer boost,” buyers will need a total household income of £50,000 or more, which will need to come from employment.

They will also need to purchase a property with a deposit of at least 10 percent.

Halifax says the additional loan cannot be used for shared ownership or shared equity schemes.

It could help first-time buyers who earn enough to cover mortgage payments but are struggling to come up with enough cash for a deposit.

Stephen Perkins, managing director of Yellow Brick Mortgages, told Newspage: “This is a very welcome change from the UK’s largest mortgage lender.

‘Affordability has long been a limiting factor for many first-time buyers, even though monthly payments are affordable.’

How does Halifax’s offering for first-time buyers compare?

Lenders generally limit most people to borrowing no more than 4.5 times their annual income.

However, Halifax is not the only lender offering up to 5.5 times income to some borrowers. Many banks and building societies already do this, although they can only offer it to a certain proportion of their customers and the rates are usually higher.

Santander offers a mortgage with 5.5 per cent interest on income, but only for those with a combined income of £75,000 or more. They must also put down a deposit of at least 15 per cent.

HSBC varies its loan-to-income ratios based on the size of a borrower’s deposit and their income, reserving higher levels of lending for those earning more than £100,000.

But there are some lenders willing to go further and offer up to six times the income.

April Mortgages, which launched its first products in April this year, will lend up to six times annual income to first-time buyers, home-movers and people refinancing their mortgage, all of whom are eligible.

It applies to both single and joint mortgage applications. This means that two people earning a combined £50,000 could borrow up to £300,000.

Another relatively new lender, Perenna, also offers up to six times a borrower’s income, provided they meet certain criteria.

To obtain any of these mortgages, borrowers will also need to pass the lender’s credit checks.

Based on an employed household income of £50,000, Halifax’s new offer will increase the maximum loan available from around £224,500 to around £275,000.

With a 10 per cent deposit, that could mean the difference between buying a house worth £246,950 and £302,500.

Is it worth it? While borrowing more relative to your income may be attractive to some first-time buyers, others will find that a larger mortgage makes their monthly payments too expensive.

Is a 5.5x income mortgage a good idea?

While some borrowers may like the idea of ​​being able to borrow up to 5.5 times their annual income, that doesn’t necessarily mean they can afford it.

Most mortgage lenders will perform a “stress test” on a borrower to verify that they can still afford their payments if the mortgage rate increases when their initial fixed rate ends, usually in two to five years.

For example, in the case of a two-year fixed rate paying 5.5 percent, a lender might stress test a borrower’s ability to repay at 8.5 percent, or in the case of a five-year fixed rate paying 4.8 percent, it might stress test a borrower’s ability to repay at 7.5 percent.

This means that even someone who wants to get a mortgage worth 5.5 times their gross annual income might not qualify.

Even if they can pass the lender’s affordability checks, they might feel that taking on a larger mortgage will make their monthly payments too expensive.

A debt-free couple earning £50,000 a year each could borrow £275,000 at a value equivalent to 5.5 times their annual income.

Halifax’s current five-year fixed rate for someone buying with a 10 per cent deposit is 5.19 per cent with a fee of £999.

A £275,000 mortgage at 5.19 per cent repaid over 30 years will cost £1,508 a month.

A couple earning £25,000 a year will take home £1,793 each month after deducting income tax and national insurance.

All told, that’s £3,586 after tax, and that’s before you factor in pension contributions, childcare costs, student loan repayments or other liabilities.

After paying off the mortgage, they will be left with a combined total of £2,078 a month.

For many people, that cost will be too high. However, for some people it may seem like a price worth paying, particularly if their rent was of a similar level.

In reality, many first-time buyers won’t need to reach 5.5 times their annual income, particularly those buying in more affordable parts of the country or getting help from their parents with the deposit.

Today, the average first-time buyer borrows an average of 3.26 times their annual income, according to UK Finance.