Wage Inflation / Mortgage Term

kriss_boy

When you punch figures into a mortgage calculator, say 100K over 20 years @ 5% = £668.68pm

Does this mean if the interest rate stays the same for the 20 years you will pay exactly 668.68 every month for 20 years?

What Im trying to fathom is to what degree wage inflation impacts the affordability of your mortgage.

Say your bottom line is £1200 and your mortgage £600. 10 years later if you recieved 2.5% wage inflation per annum your bottom line would be around £1462.

So you go from spending 50% of your income to 42%.

Or is it wayyy more complicated than that?

getmore4less

Debt does get inflated away

In the old days it had a significant effect but less so now.

Most people I know have had tiny/zero inflation based pay rises for some time.

I do remember getting 2 inflation rises a year at one point(years ago).

For most prople starting out career rises will have a much more significant effect on affordability.

blueberrypie

kriss_boy wrote: »

When you punch figures into a mortgage calculator, say 100K over 20 years @ 5% = £668.68pm

Does this mean if the interest rate stays the same for the 20 years you will pay exactly 668.68 every month for 20 years?

Yes, apart from small variations on the first and last payment.

What Im trying to fathom is to what degree wage inflation impacts the affordability of your mortgage.

Say your bottom line is £1200 and your mortgage £600. 10 years later if you recieved 2.5% wage inflation per annum your bottom line would be around £1462.

So you go from spending 50% of your income to 42%.

Yes - but it makes no difference in terms of qualifying for a mortgage, as the mortgage provider is only interested in the affordability *now*. They really can't look at future affordability, as it could go anywhere at all. You could lose your job, you could have triplets, you could blow all your money in Vegas, you could inherit from a millionaire uncle... the only *known* thing is how much you can afford right now.

kriss_boy

blueberrypie wrote: »

Yes, apart from small variations on the first and last payment.



Yes - but it makes no difference in terms of qualifying for a mortgage, as the mortgage provider is only interested in the affordability *now*. They really can't look at future affordability, as it could go anywhere at all. You could lose your job, you could have triplets, you could blow all your money in Vegas, you could inherit from a millionaire uncle... the only *known* thing is how much you can afford right now.

Thanks.

The reason I ask is my girlfriend and I are at the bottom of our pay scales and Im trying to suss out what sort of property we could afford to upsize to in a few years.

blueberrypie

kriss_boy wrote: »

Thanks.

The reason I ask is my girlfriend and I are at the bottom of our pay scales and Im trying to suss out what sort of property we could afford to upsize to in a few years.

It's a bit of a crystal-ball exercise, to be honest.

Apart from all the factors I mentioned earlier that might impact on your income and expenditure, there's also the housing market to take into account - nationally, in your region, and in your particular little area.

And there are two kinds of affordability: there's what the bank thinks you can afford, and what you can really afford. I have a fairly large family, but we spend a lot less than many families who have fewer children - the banks can do their "affordability" calculations, but they can't account for whether someone lives a fairly frugal lifestyle, etc.

kriss_boy

The main reason I ask is that like my parents Ive always saved for things and my mortgage is really the only thing Ive ever owed anyone!

My dad was saying recently though that his biggest regret in life was not stetching himself a bit more when he was younger. My parents think they played it too safe, saving to pay for the rennovations they did to their house rather than remortgaging and getting the place finished quicker and sold.

They have a really nice home now but they've paid for every penny of it compared with 'trading up' like others have.

My parents think that given the state the market is in we would be aswell jumping three rungs of the ladder in the knowledge that 5/6 years down the line we will be at the top of our scales etc.

Obviously job security is the main issue.

Rockporkchop

blueberrypie wrote: »

They really can't look at future affordability, as it could go anywhere at all. You could lose your job, you could have triplets

Both of which unexpectedly happened to us in the last year. We had the triplets then DH lost his job during my maternity leave. We did panic at first but were really surprised that the mortgage we were granted based on two fairly high salaries was still reasonably affordable on one lower salary. If you are any good with money you do manage, it also helped that we had previously overpaid the mortgage at every opportunity we could.

Just out of interest, what do you consider to be three rungs up on the ladder?

kriss_boy

Well I live in Scotland but outwith the likes of Edinburgh or Glasgow so 200K for example gets you a really nice 3 or 4 bed stone built semi on one of the nicest streets in town!

Our combined income is 40K per annum although our mortgage is about 78K.

So recently Ive been playing about with mortgage calculators to see how affordable a mortgage of 140, 160, 180K etc would be.

Both our pay scales go well into the 20s, my girlfriends hits 30K. So providing we keep our jobs through these troubled times our combined income is likely to be about 50K in 5 years, and around 55K a couple of years after that.

But we both aspire to apply for better paid jobs in the future.

ixwood

It's an interesting point. I sometimes wonder if paying your mortgage off ASAP and then save, or borrow, borrow, borrow and constantly up size property is the best strategy long term. I'd like to see a proper analysis of it.

Debt does generally get deflated away. But, the interest you're paying at the time isn't, so I'm not sure if that cancels it out.

The baby boomers had periods of high inflation to deflate their debt. For the last 20-30 years we've had low inflation.

kriss_boy

Im just trying to get my head round it.

Do you take a gamble and buy a house you see no reason why you wouldnt stay in for the next 20 years. Getting it cheaper but stretching yourself for the next 4 or 5 years.

Or make the same move in 4 or 5 years time providing you've kept your job and worked your way up your pay scale.

Plan B no longer exists in my opinion- buy a couple of houses inbetween, do them up and sell em at a profit. Not sure thats possible right now.

kriss_boy

The main reason Im asking is its crazy the extent you pay back increases on, say, 200K over 25 years compared with 40 years.

25 years may equate to £1200 pm compared with £1000 pm for 40 years.

Its makes sense but its quite disturbing how that £200 extra reduces the term of your mortgage by 15 years!