Halifax offers first-time buyers higher mortgages, up to 5.5 times their income: is that a good idea?

First-time homebuyers can now get a bigger mortgage when they apply to Halifax.

The mortgage provider announced today that £2 billion will be made available to first-time buyers who need to borrow up to 5.5 times their annual income.

To qualify for what Halifax calls the ‘First-time buyer boost’, buyers must have a combined household income of £50,000 or more, which must come from employment.

They must also purchase a home with a down payment of at least 10 percent.

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

It could be a solution for first-time homebuyers who earn enough to pay their mortgage but struggle to raise enough money for a down payment.

Stephen Perkins, director at Yellow Brick Mortgages, told Newspage news agency: ‘This is a very welcome change from the UK’s largest mortgage lender.

‘Affordability has long been a limiting factor for many first-time home buyers, despite monthly payments being affordable.’

How does the Halifax first home buyer deal compare to this deal?

Lenders typically limit most people to a loan amount of 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 of 5.5 times income, but only for those with a combined income of £75,000 or more. They also need to put down a deposit of at least 15 per cent.

HSBC varies the loan-to-income ratio based on the size of the borrower’s deposits and how much they earn, with higher loan amounts reserved for those earning more than £100,000.

But there are also lenders who want to go even further and offer up to six times the income.

April Mortgages, which launched its first products in April this year, lends up to six times annual income to eligible first-time buyers, people moving house and people refinancing their mortgages.

It applies to both individual and joint mortgage applications, meaning two people earning £50,000 between them could potentially borrow up to £300,000.

Another relatively new lender, Perenna, also offers loans of up to six times the borrower’s income, provided certain criteria are met.

In order to get such a mortgage, borrowers must also pass the lender’s credit checks.

Based on a household income of £50,000, Halifax’s new offer increases the maximum available loan 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 a mortgage with an income of 5.5x a good idea?

While some borrowers may enjoy being able to borrow up to 5.5 times their annual income, this does not necessarily mean they can afford it.

Most mortgage lenders will carry out a ‘stress test’ on the borrower to check whether the borrower can still afford the repayments if the mortgage interest rate rises when the original fixed rate expires, usually after two to five years.

For example, at a two-year fixed rate with an interest rate of 5.5 percent, a lender might stress test the borrower’s ability to pay 8.5 percent. At a five-year fixed rate with an interest rate of 4.8 percent, the lender might stress test at 7.5 percent.

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

Even if they pass the lender’s affordability checks, they may still find that a higher mortgage will make their monthly payments too high.

A debt-free couple each earning £50,000 a year may be able to borrow £275,000 at 5.5 times their annual income.

Halifax’s current five-year fixed rate, aimed at 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 costs £1,508 a month.

A couple earning £25,000 a year each would have £1,793 a month left after income tax and National Insurance.

That adds up to £3,586 after tax. And that’s before pension contributions, childcare costs, student loan repayments and other liabilities are taken into account.

After paying off the mortgage, they have £2,078 a month left between them.

For many people, that will be too high a price to pay. For some, however, it may seem like a price worth paying, especially if their rent is comparable.

In reality, many first-time homebuyers don’t necessarily need to invest 5.5 times their annual income. This is especially true for buyers in lower-cost parts of the country or those who have a parent helping hand with the down payment.

According to UK Finance, the average first home buyer currently borrows 3.26 times their annual income.