Mortgage Myths No 1

Northern Rock got themselves into trouble by giving mortgages for 125% to first time buyers who couldn’t afford them.

This is one of the most common myths to be heard at the moment, and perhaps that isn’t surprising. There is certainly much truth in the view that it was Northern Rock’s aggressive business plan which got them into difficulties, but it is also true that some truly inept mismanagement by the authorities guaranteed their demise.

With their unerring ability to spot a scapegoat tied to a bandwagon, a number of politicians queued up to heap scorn on Northern Rock, the FSA, the Treasury, the Bank of England and their colleagues in government, not necessarily in that order. In the clamour for the sound bite, the truth became an early casualty.

Northern Rock did not ever lend more than 95% of the property value on a secured mortgage. They did have a facility called the “Together” mortgage where applicants who had a good credit history (and it did have to be good) could take a separate unsecured loan for £30,000 or 30% of the property value whichever was the less. This meant that the only applicants who could actually borrow 125% or the property value were those buying for £100,000 or less. This was no different from an applicant obtaining a 95% mortgage from any other lender and arranging a separate loan themselves, and many did.

Another of the criticisms levelled at Northern Rock was that their income multiples were too high and as soon as interest rates started rising, people found themselves in difficulty.

Again, this had very little basis in fact. To gain the highest income multiples, Northern Rock insisted that an applicant opted for a fixed rate of five years or longer, thus locking in affordability. Even at low rates of wage inflation, an applicant could expect to be earning at least 20% more at the end of the five year period, and that provides for quite a hike in interest rates before affordability would be reduced.

Perhaps the best indication of whether Northern Rock lent in a reckless manner is an examination of their arrears book, and we are informed that their together mortgages actually default less than many standard mortgages.

RIP the Northern Rock Together plan, it will be sorely missed and did more to help first time buyers onto the housing ladder than any number of ill thought out new initiatives being introduced by its current critics.