The news that Abbey has finally confirmed that offering borrowers five times their salary to help them onto the property ladder is now official practice is a huge cause for concern.
Many banks and building societies have been offering such a facility for some time, but have been a little shy about advertising the fact.
Now that Abbey has gone “official”, commentators are predicting it will open the floodgates for others to do the same (http://news.bbc.co.uk/1/hi/business/6104522.stm).
On the face of it, this could be construed as a common sense decision. As house prices continue to rise, would-be homeowners are finding it impossible to enter the property market while existing mortgage payers are unable or unwilling to move up the ladder.
Individuals or couples with a 25% deposit for their house, a good credit rating, low debt levels and an annual income of £50,000 or more will be eligible – this means, for example, that a couple borrowing £250,000 with a shared annual income of £50,000 would face repayments of about £1,400 a month (£17,000 a year). Providing such a deal might well prove attractive and could even help a few take that highly prized step onto or up the property ladder.
However, it also instantly saddles them with the kind of debt levels that many campaigners warn lead to intolerable stress, broken relationships and even suicide in extreme cases. There have been dire warnings for several years that as a nation we are sleepwalking into debt with little or no fear of the consequences.
It is often said by experts in the field that many of us are two unpaid monthly pay cheques away from living on the street. Such is the level of debt we now have – whether that is mortgage repayments, credit card agreements, store card payments, personal loans or any other long-term commitment – that if we were given two month’s notice many of us would not be a in a position to meet our financial obligations once the pay cheques stop arriving on the doorstep. And yet we continue to be offered higher credit limits, bigger overdrafts and mortgages at five times our salary and we continue to snap them up.
We live in such an aspirational society that the bigger house, the newer car, the latest High Definition televisions, the holiday of a lifetime, are not the “one day” dreams they used to be. They are now the basic requirements of modern living. Without the newest, the biggest, the best, we simply don’t have a happy or fulfilled life – at least that appears to be conventional wisdom for an alarming number of people. And financial instiutions are helping to feed that rampantt consumerism.
Two questions struck me after Abbey’s announcement.
Is it really worth committing £1,400 a month to invest in a property market that many analysts insist is on the brink of collapsing?
More importantly, don’t such financial institutions have a responsibility to ensure we can successfully and responsibly manage our money and shouldn’t dangle temptation in front of those who obviously will struggle to stay afloat?
(Anyone struggling with the level of their debt can get free, professional advice from a number of sources. Go to http://www.citizensadvice.org.uk/ or contact your nearest Citizens Advice Bureau for more details).