Abbey grabbed the headlines for all the wrong reasons last month with the launch of its new five-times salary mortgage. While the product caused barely a ripple in the industry itself, Abbey’s move resulted in reports on both the BBC and Sky News, as well as stories in the national press, once again warning of an imminent meltdown in the property market, taking over-indebted mortgage borrowers with it.
Debt ‘experts’ were wheeled out to criticise Abbey, with the Consumer Credit Counselling Service (CCCS) describing the product as ‘a path towards home buying, but with a precipice to one side of it’. The quote by CCCS’ chairman, Malcolm Hurlston, in The Guardian went on to say: “The people who are likely to be attracted to this kind of mortgage will be first-time buyers, and we know these are the people who are most vulnerable to the life changes that can push people in to serious financial difficulties.”
Nothing new
On the face of it, the critics have a point as we are constantly bombarded by news of spiralling consumer debt – currently up to around a trillion pounds. Growing numbers of people are declaring themselves bankrupt or insolvent, and repossessions are now at their highest level since 2001, according to the Council of Mortgage Lenders (CML). Last week’s Base Rate hike to 5 per cent doesn’t help matters.
However the Abbey mortgage is nothing new as many lenders have been offering mortgages in excess of the traditional 3.5 income multiple for quite some time. As one insider told Mortgage Introducer: “There are lenders that will already offer five times salary – some will offer even more. But they keep quiet about it.”
It is unclear just why the mainstream media focused on Abbey’s launch so heavily. Although the product offers up to five times joint salary, borrowers must earn at least £60,000 a year and have a 25 per cent or more deposit, meaning it is unlikely to be within reach of most first-time buyers. The lender says it is just responding to the needs of its borrowers and helping those with stronger incomes afford to buy.
A surprising response
The lender admits that the widespread publicity for its new mortgage took it somewhat by surprise, in particular the emphasis that some journalists took. Abbey spokesperson, David Stewart, explains: “There has been a strong focus on consumer debt in the press recently, so it is understandable to a degree. However, getting across the details of your mortgage properly in this situation can be a challenge.”
He adds: “This product is not adding to the spiral of debt because we have the processes in place to lend responsibly. We assess a customer’s income and outgoings to ensure they are balanced – and not just affordability now, but also down the line. This makes us a responsible lender.”
Stewart believes the real challenge is getting consumers and the wider media to understand that responsible lending is the foundation of any mortgage product. For some lenders this could be based on income multiples, whereas for others the emphasis is on affordability.
The key to understanding is to get good advice. Stewart says: “We are trying to get across to people that they need to seek the right advice, and follow up on good advice. They shouldn’t get swept away on the headlines. They need to understand the products so the true benefits can be seen.”
Headlines above information
Stewart says that although some journalists did try and paint the Abbey mortgage in a negative light, many of the personal finance writers that the lender deals with on a regular basis had a good understanding of the product and did not believe it represented any kind of irresponsible lending. It would seem then that editorial policy by some publications puts headlines above information and education.
In an article entitled ‘Mortgage Meltdown’, the Sunday Mirror ran a story predicting soaring interest rates, sky-high property prices, worsening repossessions and borrowers saddled with debts they can no longer afford. It said Abbey’s move, likely to be followed by other lenders, would make things worse.
It was left to Ray Boulger, senior technical manager at brokerage John Charcol, and Simon Read from specialist lender Victoria Mortgages, to bring some balance to the article. Boulger pointed out that house price increases have hit many would-be buyers, so that lenders have been ‘re-designing their product ranges to help borrowers achieve their home-ownership goals’. Read, on the other hand, explained how regulated the industry is and highlighted the importance of consumers getting good advice. He warned that the big problem is not larger mortgages, but ‘the ease with which consumers can get unsecured borrowing – in particular from personal loans, credit cards and store cards’.
In fact the CCCS, the charity whose chairman, Hurlston, was quoted widely in the media during coverage of the Abbey launch, also agrees consumer debt is more of a worry than larger mortgages.
Quoted by the BBC about the Abbey mortgage, Hurlston said: “For some people this is going to look like the answer to their prayers, but it risks taking them into dangerous territory.” However, speaking to MI this week, CCCS’ head of media, Frances Walker, admitted: “I don’t really understand why the Abbey story got so much coverage.”
Walker believes that there is a lot of emphasis on new mortgage innovations, such as the five times salary product and the spate of loans available for up to 40 years, but not enough information about the potential downside for consumers struggling with too much debt. She explains: “We see a lot of people take their credit to the brink with their mortgages, but their credit card spending pushes them over the edge. The mortgage is just a start.
“We are perfectly sympathetic to the problems people having getting onto the housing ladder, but people have to realise that if they use a bigger multiple, they have to think carefully about their figures and how much they will have to pay out. There will be no slack, so do you have the resources if things go wrong?”
A sympathetic approach
The CCCS provides help and advice for people that have got themselves into debt problems. Walker says she would like to see mortgage companies becoming more sympathetic to the plight of borrowers that are struggling with their payments, once again pointing out that repossessions have increased dramatically in the past 12 months.
According to a report published by the CML in August, repossessions in the first half of 2006 rose to 8,140, an increase of more than 3,500 on the same period in 2005 and almost 2,500 up on the second half of last year, putting them at their highest level since 2001. The CML estimates that the total number of repossessions this year will hit 12,000, yet this is still lower than the figure of 18,280 in 2001 and way below the 43,890 repossessions recorded by the organisation in 1990 at the height of the property crash. Even at current levels repossessions only account for 0.1 per cent of outstanding mortgages, so the CML and lenders believe that the balance of affordability to lending is correct.
Figures like the above still trigger headlines in many papers, particularly those looking to draw parallels with today and the crash of the 1980s. David Hollingworth, head of communications at brokerage London & Country, believes that property stories are always favourite headline grabbers for the mainstream press. He says: “First and foremost, housing always makes a good story and the media is very interested in the topic. If it looks like prices are may be running away, this will always grab the headlines.”
Specifically regarding the Abbey story, he says: “Depending on what coverage you saw, some of it was quite balanced, particularly in the personal finance sections. I think it was the broadcast media that made the story so much bigger.”
Hollingworth says that ironically as a result of all the coverage Abbey will probably get lots of enquiries from consumers wanting a mortgage of five times their salary, but they will be turned down because they don’t qualify. So ultimately by highlighting the mortgage but not explaining the details, some quarters of the press will have done consumers a disservice.
Hollingworth continues: “In one sense, why shouldn’t the media pose the question ‘are people borrowing too much’, especially as reports say that repossessions are on the up. But the story gets lost when you know not everyone can get the Abbey deal. It’s wrong for this to be presented as an unprecedented move.”
In many respects Abbey will have done other lenders a good turn by getting higher income multiples out into the public consciousness. The lender is not alone in offering such products and the entire industry has been moving towards affordability in recent months as a way of raising the amount of money they can responsibly lend. It’s likely then that we will see a flurry of higher income products in the future and possibly more talk in the mainstream press about ‘affordability’.
Hollingworth agrees, although he does believe lenders will be cautious. He explains: “Lenders will walk a bit of a line on this, particularly with the Financial Services Authority (FSA), as they don’t want to be seen as irresponsible. Lenders have been moving to affordability, which has been accepted by the press and brokers and consumers. It seems it is the thought of income multiples of five times a salary that has got people hot under the collar.”
The FSA says that although it is not in its role as regulator to legislate on criteria such as income multiples, it would, of course, be monitoring changes in the market. It did however point out that lenders must be aware of regulation with regards to affordability. FSA spokesperson, Robin Gordon-Walker, told MI: “Regulation covers responsible lending and affordability and it states that lenders must take into account the ability of a borrower to repay their mortgage over the length of the loan.”
Going public
One of the first lenders to go public with their own higher income multiple offering following the Abbey story was Platform, which has launched non-conforming products with income multiples up to five plus one or 3.5 times joint, as well as 4.75 plus one or four times joint salary for self-cert mortgages. Platform again stresses that the products follow responsible lending criteria and that a client’s financial circumstances will be fully assessed before a decision is made.
As with Abbey, the lender says its new products are being introduced to meet public demand. Paul Hunt, Platform’s head of marketing and PR, explains: “You have to bear in mind that salaries have not increased at the same rate as house prices. It is vital that people can buy property and anything that lenders can do to invigorate the market is important. Lenders must look to innovation – we use income multiples whereas others use affordability.”
Hunt also believes that the publicity surrounding Abbey’s new product will ultimately be good in raising awareness to both consumers and the industry in general. He says: “The movement by Abbey to five times salary, by such a big name, is an important step for the market and it should be applauded.”
Platform believes that developments such as higher income multiples and affordability show how the industry is responding to the changing needs of borrowers. Because this can mean that products become more complex, Hunt says that brokers are more important than ever. He says: “The role of the intermediary has become amplified because the ability of the consumer to shop around is more difficult. Brokers are invaluable – 65 per cent of mortgage business in the UK comes through them, and they must ensure the products they recommend fit into their client’s life plans.”
But Hunt believes that customers must also have a better appreciation of their circumstances. “At the end of the day,” he says, “it is also the responsibility of the borrower.”
Until that happens and the public’s grasp of financial services improves, there will always be an imbalance between the industry’s attempts to help more people own their own homes, and the general media’s perception of how well that job is being done.
