British Banks Stretch Home Loans Amid Red-hot Property Market

Posted 06 November 2006 @ 10:26 am EET     Print     Reprint     E-Mail     Comments

LONDON (AP) - Potential home-buyers are being offered unprecedented loans to help secure a first property a nation where the average house price has soared almost 200 percent in a decade.

Abbey, Britain's second biggest provider of home loans, last week increased the amount it would lend first-time buyers to five times their gross salaries from 4.5.

Individuals or couples wishing to buy their first home are entitled to this offer providing they earn 50,000 pounds (75,000 euros, 95,000 dollars) a year and have a deposit worth 25 percent of the property's value.

A couple jointly earning 50,000 pounds a year who borrow a quarter of a million pounds would typically have to repay 1,400 pounds per month.Following Abbey's announcement, experts warned of borrowers struggling to meet repayments.

"To some people this is going to look like the answer to their prayers, because suddenly they are going to have the opportunity of borrowing the amount they feel they need to borrow," said Malcolm Hurlston, chairman of the Consumer Credit Counselling Service.

"But it risks taking them into very dangerous territory, not least because interest rates are likely to be going up as well. "They are going to be very heavily stretched and if their salaries don't go up in the way they think they are going to do, they could find themselves dangerously overstretched," Hurlston added SUnday.

House prices in Britain have soared 187 percent over the past ten years, Britain's biggest home-loans provider Halifax said in a report published last month.

Nici Audham Gardiner, mortgage product executive at Abbey, which is owned by Spain's Banco Santander Central Hispano, said her bank's move was aimed at making it easier for first-time buyers to join the property ladder. "There are people who feel that they do not want to get on the property ladder, but those who do face many barriers, of which the most notable is the cost of homes," she said.

But Ray Boulger, senior technical manager at mortgage broker John Charcol, warned: "Borrowers need to ensure that they are not overstretching themselves, especially if they do not have a fixed rate mortgage, and that if their monthly repayment increases, they will still be able to make ends meet."

With British interest rates set to rise to a five-year high this week, borrowing costs for home-buyers could increase too. The Bank of England is widely expected to raise the "repo" rate the rate of interest at which it lends to commercial banks by a quarter-point to 5.00 percent on Thursday, according to economists.

British retail banks would likely follow such a hike by increasing their home-lending rates also by a quarter of a percentage point. The average house price in Britain surged to 179,425 pounds in the third quarter of 2006 from 62,453 pounds in the first quarter of 1996 an average increase of 10.6 percent per year according to Halifax.

In London, house price gains were even bigger, rising by 240 percent or 12.4 percent per year since a decade ago. Abbey is not alone among providers of home loans to increase mortgages for first-time buyers in Britain. Last month, Bristol and West increased its offer to 4.5 times people's salaries from four times previously, while Nationwide has raised its borrowing level in recent months.

The traditional limit for British lenders has been three and a half times salary. According to research by Abbey published last week, 17.3 million adults are unable to join Britain's property ladder, with 7.4 million citing house prices as one of the main reasons. Other barriers to buying a house include not being able to afford the deposit and being unable to find a suitable mortgage.