Police officers, fire fighters, nurses, teachers and serving members of the British Armed Forces can now access bumper mortgages of up to five times their income.
Specialist lender Kensington has unveiled its new ‘hero mortgage’, which allows certain essential public sector workers to borrow up to five times their annual income to purchase a home.
To qualify they need to have a minimum 10 per cent deposit and be under the age of 40. It means a qualifying public sector worker on an income of £50,000 would be able to take out a mortgage of £250,000, rather than the £225,000 they’d likely get with a standard deal.
The deals are only available to ‘essential public sector workers’ such as firefighters or teachers
Back in the days before the financial crash, lenders would base the maximum amount you could borrow on a multiple of your income. This ratio, known as the loan-to-income ratio, is now generally capped so that you won’t be accepted for a mortgage worth more than four and a half times your income, or you and your partners’ combined income if you buy as a couple.
Kensington’s new mortgage deals let you go up to five times more because these public sector workers have steady earning potential and more job security than many other professions.
Kensington has also tweaked the debt-to-income ratio, meaning how much of your monthly income goes towards paying off debts such as your credit card or car finance.
Kensington’s deal will allow a little more slack here than a standard mortgage would with this ratio capped at 55 per cent, an improvement on the industry standard of 50 per cent.
Despite the relaxed affordability thresholds, this doesn’t mean that if you fit these two criteria then a mortgage is guaranteed.
Kensington will still want to go through your income and expenses, and will want to ‘stress test’ your finances to see if could afford repayments should your circumstances change.
The Bank of England brought in rules after the crash limited how many risks lenders could take
Appealing as it may sound to those who might be looking at a slightly bigger loan, all the deals offered in this range are very expensive – and will end up costing far more in the long run than many other deals out there on the market.
In total there are eight different types of hero mortgage available, four of which are two-year fixes and four of which are five-year fixes.
The cheapest five-year version is a 75 per cent loan-to-value five-year fixed rate at 3.54 per cent, with a £999 fee. Alternatively the deal can come fee-free, but at a rate of 3.94 per cent.
At the other end of the spectrum, for those with smaller deposits, a 90 per cent loan-to-value five-year fix at 5.29 per cent with no fee, or 5.04 per cent with a £1,299 fee.
There’s also an 80 per cent loan-to-value five-year deal at 3.54 with no fee or 3.69 with a £999 fee, and an 85 per cent loan-to-value five-year deal at 4.24 per cent with no fee or 3.99 with a £1,299 fee.
As for the two-year deals, the cheapest available is a 75 per cent loan-to-value deal at 2.74 per cent with a £999 fee, or fee-free at 3.24 per cent.
The most expensive is a 90 per cent loan-to-value deal at 5.29 per cent with no fee per 4.89 per cent with a £1,299 fee.
Purchases include a free valuation, while remortgages include a free valuation and legals or free valuation and £250 cashback towards legal fees.
All of the deals come with early repayment charges. For five-year deals, the charge is 4 per cent in the first year of the mortgage, decreasing by 1 per cent each year until reaching 1 per cent in year five.
For two-year deals, Kensington charges 3 per cent in the first year, and two per cent in the second year.
They’re also not portable, meaning you can’t take your mortgage with you if you move house.
While these deals will allow some to borrow a bit more, they come at a price with high rates
How do hero mortgages compare?
There are plenty of better deals out there already, albeit with slightly tighter affordability rules attached.
Santander has a two-year fixed rate 75 per cent loan to value mortgage with a 1.45 fee.
One of the biggest advantages of this deal, and of course most others, is that it’s available to anyone who matches the affordability requirements and has the necessary deposit, whether they work in the private or public sector.
On a £250,000 mortgage taken over 25 years, the Santander option would cost £994 a month, while Kensington’s equivalent deal would cost £1,152. Over the lifetime of the mortgage with the Kensington deal you’d end up paying a whopping £47,405 more in interest.
High loan-to-income mortgages
There are a few mortgages like this around, but they are few and far between.
They’re also almost always limited to certain types of job – ones with clear salary growth potential.
For example Darlington Building Society has a deal that allows certain professionals, such as lawyers or doctors, to borrow up to six times their salary.
This of course limits the risk to lenders: lending a bit more to someone isn’t quite as risky if you know they’re going to get a pay rise in the future.
The lack of options may come as a surprise considering how competitive lenders are currently on rate.
This comes down to regulation. Since 2014 the Bank of England has said that lenders can only offer up to 15 per cent of their total mortgages at income multiples of four and a half times or greater.
Kensington’s highest loan-to-value hero mortgage, the 90 per cent two-year loan-to-value deal at 5.29 per cent with no fee, is demolished by other deals in its LTV range such as Coventry Building Society’s two-year 90 per cent deal at 1.85 per cent with a £999 fee.
In this instance, with a £250,000 mortgage taken over 25 years Coventry’s deal would cost £1,041 a month while Kensington’s would cost £1,504.
Taking Kensington’s deal in this case would cost an astonishing £137,766 more in interest over the lifetime of the mortgage.
Why would you take this deal?
While the hero mortgage may allow certain types of public sector worker to borrow slightly more, the rates mean that they’ll be paying a heavy price.
On top of this, there are already lenders lending on loan-to-income multiples even higher than Kensington’s five times ratio.
Pete Mugleston from brokerage Online Mortgage Advisor said: ‘There are other lenders willing to go to six times income for ‘non-heroes’, so this is not necessarily revolutionary, albeit improved on Kensington’s standard range.’
However, Kensington could come in handy is for those with low credit scores – an area the lender specialises in and can be more flexible on than others.
But is it safe for lenders to be stretching the affordability rules like this? After all, wasn’t it this type of risky lending that helped crash the economy back in 2007/8?
Broker David Hollingworth from L&C Mortgages said: ‘This is not a case of letting loose the reins completely and affordability tests will need to be met of course.
‘The rates are available to those with at least 10 per cent to put down and the maximum age of 40 ensures it is aimed at the right group that will see income grow over time.’
Mugleston added: ‘For those with more stable and sustainable income this is not necessarily a huge risk today, although if rates increase in time, they’d be at the upper limits of what they’d perhaps want to spend on their mortgage.’
There are cheaper options out there, and there are options that allow you to borrow more, if that’s what you’re looking for.
Unless you’re a very specific type of public sector worker, perhaps with a less than perfect credit score, and you’re desperate to borrow just that little bit more at a heavy cost, then you’d probably be better off taking one of the many cheaper deals on the market.