Mortgages alert over five-times salary

YOUNG workers are being offered mortgages worth five times their salary as first-time buyers struggle to keep up with soaring house prices. The deal, which echoes those available during the Eighties boom-and-bust, is aimed at around one million public service workers.

The Portman building society will lend at least £100,000 to first-time buyers provided they earn more than £20,000. Even so, £100,000 will buy only the most basic of properties in London and the South East, where public sector workers are most vitally needed.

Other lenders offer as much as seven-times salary to certain professions. The schemes come despite warnings from Sir Howard Davies, head of the City watchdog the Financial Services Authority, that young workers are borrowing more than they can afford. Sir Howard has argued that a home loan of a maximum of three times a single person's salary and twice a couple's joint income would be prudent.

However, with house prices soaring by 20% a year and the average home worth nearly £110,000, banks and building societies are being forced to break these guidelines.

The situation is reminiscent of the 1980s house price boom. The crash which followed left thousands tied into properties worth less than they owed. Many had their homes repossessed or simply handed back the keys, giving them a black mark on their credit record for years. Many had bought their homes with 100% loans based on high multiples.

The Portman scheme, which is available only through mortgage brokers The MarketPlace at Bradford and Bingley, is one of a number aimed at first-time buyers. Some lenders have shifted to using an affordability test rather than a simple salary multiple, which in a few extreme cases can see customers borrow up to seven times their income.

Standard Life Bank's affordability test - assessed on how much a person can afford to repay each month - allows young professionals with high-earning potential, such as doctors and chartered accountants, to borrow up to 4.5 times their salary.

Northern Rock offers home loans equivalent to 125% of a property's value, while 100% loans are available from the Royal Bank of Scotland, Norwich Union and Scottish Widows.

Davies has warned the industry against this high-risk strategy, saying: 'It's important lenders do not allow the hard-earned lessons of the last recession to recede from the memory.'

A spokesman for the National Consumer Council said: 'First-time buyers need to think very carefully before taking on a loan of this size. They need to factor in all their existing repayments and look at the impact of water rates, council tax and repair bills.'

Bradford and Bingley insisted the Portman deal, which is also available to non-public sector workers, is a responsible offer. It said the increased multiple reflects the greater job security of those who work in the public sector. And it argued that low interest rates, which will go up in steps over the first five years of the mortgage, mean repayments will be affordable.

Group commercial director Ian Darby said: 'This product provides the potential for young professionals and key service workers who have been particularly hard hit by recent increases in house prices to get a foot on the ladder.'

The deal is available only after face-to-face interviews and requires a 10% deposit.