How did the 3x or 4x income level get chosen?

lostinrates

Jenner, this is such a good question. I've been googling a bit and its very frustrating. All the nomal words for a search about the origins of a practice all are used in very modern lending...for example a search for history of mortgage lending brings up reams about credit history! I kinow the tinest amount of history about the Lombards etc, but nothing insightful or that I'm too sure is correct.

scousethife

How did the 3x or 4x income level get chosen?

I have no idea

but

When that was the status quo, banks did rather well

Sinse they dropped that idea, and lent anything to anyone, they virtually ALL went bust.

Sorry all went bust and got tax payers money and bonus'

We should have had a referendum on the bail outs.

|I bet that lawyer who gets all the Man utd players off can bring the government to court and get our billions back

treliac

It was clearly based on a calculation of affordability and worked well in the past, all other things being steady and leaving out the unexpecteds such as unemployment.

I had my first mortgage in the mid-eighties, on a single and not very high salary. I managed, could only afford to live though. No treats or going out so I got a weekend pub job, for the opportunity to get out as I couldn't afford to otherwise.

House prices will have to come down a great deal for those sort of multiples to be restored. That would mean the market being in the doldrums for an awful long time.

bandraoi

When you play with the numbers, you find that house renting for 1/3rd of your monthly take home pay, is valued at roughly 3 times your income on standard

Value = 15 years rent

type calculations.

Quick back of envelope calculation would be something like:

Accommodation costs tends to be about 1/3rd take home pay, and take home pay tends to be about 2/3rds of gross salary.

Rent is about 2/9 * (Annual Salary)
Monthly Rent Payment is about 2/(9*12) * (Annual Salary)

Value of property = 15*12*2/(9*12) * (Annual Salary) - based on value = 15 years rent.
Which leaves you with
(30/9)*Annual Salary

or just over three times annual salary.

Valuing the property at 15 times annual rent means the investor expects a return on their money of 6.7% a year, which isn't a bad rate of return for a long term investment.

Granted there are huge generalisations there, but it's interesting that they both work out the roughly the same.

Pobby

When I took out my first mortgage, mid 70s, this was against a climate of inflation. Inflation that not only was present in the price of stuff but also reflected in wages. So mid 70s was a great time to buy as the mortgage debt was gradually wafted away. As I recall we had a mortgage of around £9,000 with a monthly repayment of £60. Our joint income was about £3,000. 5 years later our income had risen to about £18,000 due to inflation and promotion.

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Pobby wrote: »

When I took out my first mortgage, mid 70s, this was against a climate of inflation. Inflation that not only was present in the price of stuff but also reflected in wages. So mid 70s was a great time to buy as the mortgage debt was gradually wafted away. As I recall we had a mortgage of around £9,000 with a monthly repayment of £60. Our joint income was about £3,000. 5 years later our income had risen to about £18,000 due to inflation and promotion.

This is what the QE supporters are hoping will happen, unfortunately wages won't follow this time and everyone will get poorer, then we have the 'nice' tax tsunami that is going to hit, just has Labour lose power. People think things are bad now ??, this is only the beginning.

wolvoman

Why are these ratios even important?

My mortgage is currently 4.5 times salary and it's an utter piece of cake to pay it off. In fact I'm overpaying by a huge amount.


Yet some on here would 'prevent' me from having that option - how sad.

Rikki

wolvoman wrote: »

Why are these ratios even important?

My mortgage is currently 4.5 times salary and it's an utter piece of cake to pay it off. In fact I'm overpaying by a huge amount.


Yet some on here would 'prevent' me from having that option - how sad.

Is this because of the low interest rate?

Not everyone who has borrowed 4.5 times their income would be in a position to meet the repayments with such ease.

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wolvoman wrote: »

Why are these ratios even important?

My mortgage is currently 4.5 times salary and it's an utter piece of cake to pay it off. In fact I'm overpaying by a huge amount.


Yet some on here would 'prevent' me from having that option - how sad.

What's the rate, could you pay it p*ss easy if they were at 8% ? or 12% ?

lostinrates

It could easily be within affordabilty .

eg Half your income to a mortgage is hard if you earn, say 25k, and it leaves you with half that after mortgage, not so hard to live within if you earn, say £100k.