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

GDB2222

The affordability calculation needs to take into account average interest rates over the lifetime of the mortgage, or maybe maximum rather than average. Anyway, the current low rates are not a very good guide to the long-term future.

bubblesmoney

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.

there will always be outliers like you in any system. but what the median income multiple shows by historical evidence the world over is that urban property is affordable when the multiple is less than 3. good policies rely on historical evidence and also what affects the population in general and median income multiples are the best way that has had the test of time. people dont make policies based on outliers in a sample population.

same sorts of risks have been proved with reserve ratios of fractional reserve banking. when reserve ratios were more conservative as greater than 1: 12 or 14 the system was historically more stable. but banks went more leveraged when sweep in features were allowed or exemtions were allowed where even 0 yes zero reserve ratios were allowed by the FED under emergency rules. now their are taking a bite out of the cake made of sh1te they tried to sell everyone as all the banks that needed bailouts were ones that had excessive leverage and less than the traditional reserve ratios. many of these zombie banks have a tangible common equity of less than 2% now in most usa banks. most U.S. banks are at or close to insolvency by TCE measure, which speaks at least as much to the harshness of the test as it does to the actual financial condition of many of the banks. i dont have access to that data about uk banks but i guess it wont be much different with the likes of northern rock, rbs, lloyds, hbos, bradford& bingley in our (tax payers) portfolio. all the banks that went bust were ones that had almost double the ratios of the conservative ratio used earlier. so this in effect proves the value of having more sensible reserve ratios for banks.



preffered shares status now being given to govts and sovereign funds and big bucks investors short changes the common investor as they will come last in line if the bank goes bust. hence for any investors the common stock position (tangible common equity) is important to assess the value of the investment for themselves. here in lies the importance of the TCE, but obviously the regulators prefer the more pliant version called tier 1 capital ratio where they can lump together preffered and common stock and show viability.

lostinrates

bubblesmoney wrote: »

there will always be outliers like you in any system. .....

I agree. But my point is that this suggest to me that within tighter regulation and checks on affordability multiples should form a part but not a strict limit, or even a target minimum lending. (a lot of people just want to borrow as much as they can and would want x three whther it would be servicable for THEM or not). A lot of contributers here have raised the point that x 3 with big other debts is equally or more unservicable as a larger mulitple for some one who has fewer other outcgoings and a high disposable income .

lostinrates

bandraoi wrote: »

I was posting in the context of what is easier, not what is possible.
Any home owner who is spending on the bare essentials only has a serious financial problem.

Expenditure may not be essential spend, that doesn't make it easy to give up treats, say no to friends, alter regular commitments or to source the cheaper alternatives. Sourcing cheaper alternatives can be a particular problem if you live in an affluent area.

ETA: Just to flesh the above out a bit. I did a full time post grad in London for a year and worked there afterwards. Doing the full time post grad, everyone was in the same boat and had little money. Suggestions to meet up were for coffee not dinner, everyone brought lunch to college with them and found somewhere to eat together. Starting work a year later I was still broke for the first few months but lunch was a trip to a local cafe for a group while I sat and ate sandwiches alone, meeting up became a dinner out to which I had to say no. I had more money in the second situation, but I felt like I had much less and it was more difficult.

I tried to reply earlier but my computer is being less than cooperative. We, DH and I, were perhaps better off as students than our peers, both working and earning ok when not together, and then when DH was in Post grad after we met I would say the situation was the same. I hope we never made other people uncomortbale, I think we were a darn sight more frugal than some of our friends who could possibly have afforded to be more frugal. I see you point, and agree, but again this is an individual thing, it is not applicable, for example to us , whereas we have expenditure in our lifestyle that the many of other people don't. Some of this extra expenditure can be absorbed, in our case, by a higher mulitple loan.

bubblesmoney

lostinrates wrote: »

I agree. But my point is that this suggest to me that within tighter regulation and checks on affordability multiples should form a part but not a strict limit, or even a target minimum lending. (a lot of people just want to borrow as much as they can and would want x three whther it would be servicable for THEM or not). A lot of contributers here have raised the point that x 3 with big other debts is equally or more unservicable as a larger mulitple for some one who has fewer other outcgoings and a high disposable income .

yes total debts need to be consider as well as affordability and not just the income multiple. reliability of income should be an important factor as well.

lostinrates

bubblesmoney wrote: »

yes total debts need to be consider as well as affordability and not just the income multiple. reliability of income should be an important factor as well.

You know, its weird. I've just remembered I had a friend of a friend at uni whinging onto me for hours, one of those evenings when I remebered why I avoided the student bar. He had come to vist my friend for a weekend and was going on and on about how much he earned but that as a contractor with a yearly contract could not get a mortgage and so was saving to buy outright, in N. wales IIRC, and thought he could do that within 5 years at that time. (Goodness what a borring night that was) I guess that was around 1999/200ish. I wonder is he discovered self cert....I'll never know.

IveSeenTheLight

lostinrates wrote: »

I agree. But my point is that this suggest to me that within tighter regulation and checks on affordability multiples should form a part but not a strict limit, or even a target minimum lending. (a lot of people just want to borrow as much as they can and would want x three whther it would be servicable for THEM or not). A lot of contributers here have raised the point that x 3 with big other debts is equally or more unservicable as a larger mulitple for some one who has fewer other outcgoings and a high disposable income .

At the end of the day, affordability figures will be used ahead of income multipliers for all the reasons listed before

Martinslovechild

Random Thoughts...

1. The more money banks lend, the more profit they make. It's not in their interest to lend smaller multiples.

2. Why is a mortgage duration typically 25 years? Surely, a better question for lenders to ask is 'What can you afford each month? We'll work out the mortgage duration based on that figure'.

3. Why do most lenders follow so-called 'standard' multiples rather than personalised quotations based on affordability? A large number of people exist who have no children, no other debts and a mortgage deposit saved up. Surely, it's a fairer system not treating everybody as being equal.

4. Why must we pay an arrangement fee? What's normally involved in 'arranging' a mortgage other than entering our details into a computer - something which most of us do already on the internet during our application.

5. Why do most mortgages allow overpayments of up to only 10% per annum? Are the banks afraid that everybody will revolt and suddenly repay their debt?

chopperharris

Good question on 25 years.

If your a professional then you start your home life around 25 , look to retire at 50 , so 25 year mortgage looks right.Life expectancy after 50 is a factor.

When I went for my first mortgage in early 90s it was 3.5 times my salary , the wifes income wasnt included being contractual part time.I had to save 30 percent of any price of the average first apt.We drove one 5 year old car and kept it sound and serviced , and cut back everything to the bone to get it.Got an ex-la flat as the first rung , three years later moved to an ex-la house , three years after that a "desirable" 4 bed house....all with saving and cutbacks.

In that time we basically had tesco/asda clothes , the same payg mobiles until last year and never had a real holiday until 3 years ago.....no flash means more cash.Mortgage through this life choice and some good fortune was paid off last year....16 years total.

In that time I seen growth on the value of these properties of from over 20 percent to 47 percent.If I was to sell the current home then I have maybe lost around 100k , assuming I have lost all the growth from the last three years , but still made 20 percent which is considerably more than money in the bank would have made.

Its worth noting here that I only upkept the properties and never "added" to them in order to make even more money.I have always undersold my property with the ultimate goal of offloading faster than the next property its up against at the E.A.

Property identical to mine has been on the market for over a year and has had everything done to it from the "idiots guide to property developing" , and the daytime tv programs.Its not selling and I suspect it wont for as long as their price is at the premium.If I could find my next "right" property then I would be undercutting it by a third and still make a modest 20 percent even in this market.

Hopefully regulation of all large credit facilities worldwide will be the norm.As will regulating the banks exposure with x percentage of deposits being the limit to lending and buying power.

lana22

lostinrates wrote: »

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.

I agree with the above. If I earn £1000 a month, and £500 goes on a mortgage, leaving me £500 to do everything else including paying bills, then it's harder than earning £4000 a month and having £2000 a month left over.

FWIW Our mortgage was just over 2x joint income. (Or 3.5 times highest earner). This would be very affordable even at higher interest rates, and we aren't on very large salaries at present.

It would also be affordable if we lost an income due to maternity leave, which was pretty important to us. (even though this would be short term as I wouldn't actually leave work altogether, and wouldn't even go part time).

A lot of people think that they can afford it now, but don't consider "what ifs". You can't plan for every eventuality, and you have to accept an element of risk. But in our case, the chances of a (hopefully) healthy young couple with a healthy sex life eventually having a baby was too big a risk to ignore!