33k salary, can I afford a mortgage?

bodmil

I wonder if some people with a bit more experience of this mortgage and home ownership lark could give me a bit of advise on my current situation and my affordability?

I'm currently earning approximately £33,000-£34,000 a year (before over-time), so on average just over £2,000 a month take home pay. Now I've read on here that my maximum mortgage repayment should be around a third of take home pay (£650 ish), but that I should also assume a 10% rate, as they're likely to go up. But none of the mortgages I've looked at come anywhere close to that.

I intend to borrow 3.5 times my salary as an absolute maximum rounded down to £115,000 and put down a minimum of 25-30% as a deposit to get the best rate. I also intend to get a lodger or two to help cover things and split bills.

I live either in work provided accommodation with all expenses paid, or with my parents and have only rented when I was a student so I've no real concept of the cost of council tax, bills etc, so I'm at an absolute loss as to what I can really afford. It seems like I can't really afford a mortgage at all but I don't think my wage is too bad so surely not everyone with a mortgage is on £40,000 plus?

I tend to look at my required savings as a debt that I need to pay off as quick as possible, so I could very well see myself turning into a mortgage free wannabe as soon as I've got the damn thing! :rotfl:

I would really appreciate some feedback on my situation as I'm working my socks off trying to save a deposit and would really hope to buy something soon. If that's not the case then I definitely can't keep up the amount of over-time I'm doing for long, so I either need some good news or a weekend off!

getmore4less

Ignore the % of salary stuff its what you can afford.

It really depend what you spend on living
Married 2 kids will have less than single no kids.

Do a budget/SOA one for your current life and one if you bought a place.
(detailed budget for a year, 5 year less detailed plan)

Live on the I bought a place budget.

With accomodation paid for you should be able to save loads.

For the house bits think

£150 council tax
£150 bills (gas, electric, water, telephone, internet, TV, Insurance)
Don't forget repairs so say £100pm in saving for a year(or have some aside and reduce to £50pm).

brit1234

getmore4less wrote: »

Ignore the % of salary stuff its what you can afford.

:eek::eek::eek::eek::eek:

Wasn't it thinking like that got us in the credit crunch in the 1st place.

Multiples of salary are important especially with government funding for banks ending this year and next. This is important as you need to position yourself for a remortgage when funds will be a lot shorter and mortgage restrictions tighter.

Also look at interest rates rising as well into figures.

Personally look at getting a deal for no more that 4 times salary. As prices fall and you borrow more than this you can be eaisly caught in negative equity.

People who talk about salaries not being important and talk of affordability usally increasing risk dramatically for the borrower.

Igol

The old boring sensible advice that banks used to give and with good reason) was 3x your salary.
Maybe its because I'm old and grumpy or because that rule seemed to be fine for decades, I stick to it.

property.advert

It is much easier for people who pay rent to make the switch to a property of their own as they are used to budgeting for the largest bill they pay each month. As for affordability, then this is the key, rather than some spurious multiple of salary. Banks routinely lend 4 times salary and 5 times salary is published on the websites of some banks. Again, affordability and more importantly future affordability is the key.

For people wanting their first mortgage now, they have never known "normal" interest rates. I put that figure at around 6% or 7% over the last decade but remember we did have 15% not so long before that. However, high interest rates tend to go hand in hand with high inflation and thus higher wage increases, so you have to look at how you think your salary would be affected if overall inflation rose significantly. Obviously the public finances being so poor means that public sector employees are not going to see high salary increases any time soon, whatever happens.

I cannot see a reason to fix rates at the offers currently on the table. What you gain from day one being on a low rate can be used to offset what you might have to pay were rates to rise over the fix you could achieve today. £100,000 on interest only costs £208 per month at 2.5% whereas it costs £375 a month at 4.5%.

If mortgage rates rose from now in a linear fashion from 2.5% to 6.5% over 5 years, then you would be at break even point compared to a 4.5% fix for 5 years now. That is not going to start right now so you would need rates to rise more sharply or to more than 6.5% gradually to be worse off on a variable rate of 2.5% starting today. The longer it stays at 2.5%, the higher it would have to rise and stay there for longer. I cannot make a rational argument which shows it is better to fix over 5 years and over 2 years, rates may move very little at all.

What I would advise is to think of today's rates as abnormal and budget for the average and save the current surplus, above any savings to repay the mortgage.

I am no lover of repayment mortgages as they provide terrible value in the first few years of a mortgage. Once capital is paid over, it is lost and your flexibility diminishes. Offset mortgages are a great product for the disciplined but they tend to come with higher interest rates. They are more beneficial to those paying higher income tax rates and who have already used their ISA allowances. That said, they are easy to plot in Excel and by matching income streams (salary) to expenses (direct debits for instance) they work very well. If your salary comes in on the first of the month, then you really want your direct debits to go out on the 31st, so you benefit from having all your bill money in your account for the whole of the month, boosting your average daily balance.

If you are going to take in lodgers, then you might actually want to consider a higher mortgage. Why ? well, because your deposit of 25% on a £200,000 property leaves you with a mortgage of £150,000 comes in at a multiple of 4.4 times salary. Sticking to 4 times salary with a 75% mortgage gives you a potential mortgage of £136,000 and a house purchase of £170,000. Many places will take some or all of your regular overtime into consideration.

If you had a £150k mortgage it would cost you £313 per month interest only at 2.5% and you would probably get this back from renting one room out. The bigger mortgage and house with more rooms, would give you more scope to rent rooms out. You pay no stamp duty until £250k at the moment though that may well change but the argument for a larger mortgage when you are willing to take in lodgers makes undeniable sense. As the maths shows, even an extra £50k costs just over £100 a month. The excess rental income would go a long way through an ISA to repaying your mortgage or you could simply make overpayments after replenishing your emergency savings.

I think you are in an ideal position. When older you do not want to share your house. Now, when you do not care so much, you can truly benefit from buying a larger place in your position.

bodmil

Wow, thanks ever so much for such a comprehensive reply, there's a lot to think about there, especially interest only mortgages which I hadn't thought much about previously.

It's really difficult for me to do an SOA because my current situation is totally unrealistic as I have hardly any out-goings. But I'd like to try to put one together with typical figures so I know what I would be looking at. I'll try to have a browse at other people's to get a range of figures.


In the area I'm buying in a swanky 2 bed flat is the same price as a 3-4 bed family house, so there's no need for me to take out a larger mortgage to get extra rooms for lodgers. But should I take out more and get a better place or buy in a nicer area if it means going up to 4 times my salary, with regard to investment potential? I'm rather thinking of borrowing as little as possible to live in a place that'll do and getting it paid off as quick as I can so I've got a good amount behind me for a forever house.

hethmar

Youve had some good advice there - Im not an expert but re areas - remember the adage - buy the best house you can afford in the best location. Better to have a decent 2/3 bed house in a good post code than a 4 bed one in a run down area. But its whatever you feel happy and secure about in the end.

Very best of luck.

Radiantsoul

property.advert wrote: »

If you had a £150k mortgage it would cost you £313 per month interest only at 2.5% and you would probably get this back from renting one room out. The bigger mortgage and house with more rooms, would give you more scope to rent rooms out. You pay no stamp duty until £250k at the moment though that may well change but the argument for a larger mortgage when you are willing to take in lodgers makes undeniable sense. As the maths shows, even an extra £50k costs just over £100 a month. The excess rental income would go a long way through an ISA to repaying your mortgage or you could simply make overpayments after replenishing your emergency savings.

Where is a first time buyer going to get a 75% interest only mortgage at 2.5% at a multiple of over four times their salary?

bodmil

hethmar wrote: »

Youve had some good advice there - Im not an expert but re areas - remember the adage - buy the best house you can afford in the best location. Better to have a decent 2/3 bed house in a good post code than a 4 bed one in a run down area. But its whatever you feel happy and secure about in the end.

Very best of luck.

Thanks very much, I won't buy anything in a run down area, but if the best thing to do is pay off a mortgage as quick as possible, then it would be better for me to have 3-4 rooms than 2. But perhaps that's not the best thing to do?
It'll be a case of nice area big house, or awesome area small flat really!

property.advert

Radiantsoul wrote: »

Where is a first time buyer going to get a 75% interest only mortgage at 2.5% at a multiple of over four times their salary?

The issue of whether he is a FTB is immaterial. He has a 25% or 30% deposit. FTB status is usually only material for high LTV mortgages which are often not available to those remortgaging, drawing down extra capital or moving house with low equity.

property.advert

bodmil wrote: »

Wow, thanks ever so much for such a comprehensive reply, there's a lot to think about there, especially interest only mortgages which I hadn't thought much about previously.

It's really difficult for me to do an SOA because my current situation is totally unrealistic as I have hardly any out-goings. But I'd like to try to put one together with typical figures so I know what I would be looking at. I'll try to have a browse at other people's to get a range of figures.


In the area I'm buying in a swanky 2 bed flat is the same price as a 3-4 bed family house, so there's no need for me to take out a larger mortgage to get extra rooms for lodgers. But should I take out more and get a better place or buy in a nicer area if it means going up to 4 times my salary, with regard to investment potential? I'm rather thinking of borrowing as little as possible to live in a place that'll do and getting it paid off as quick as I can so I've got a good amount behind me for a forever house.

I will give you a real life example of house versus flat.

I bought a flat once. The area was similar and this was your swanky 2 bed flat and I could have bought a house for similar money. Both went up in price but the service charges on the swanky flat started to hold back the price of the flat. Once prices rose further, the flat topped out as the houses advanced much further. Why ? not only the service charges but the simple fact that there is a shift from flats to houses as people need space for their family. Over certain levels, people can either afford one or the other and the house wins. Quite simply, the price of the flat is far more constrained because its use is more limited. The flat became too expensive for a first time buyer and someone stepping up would not need only a flat. Again the house won.

As you indicate you are willing or indeed want to share, then the house with more bedrooms is a more viable proposition. You cannot look upon it as a place you will have forever, merely for a time. Your desire to pay the mortgage off is not really that at all. Your real desire is to build wealth so that in the end house, the one where you will spend the longest period of your life, you will have little or no mortgage. Thus you can leverage your willingness to share and benefit from what I suspect will be greater capital appreciation of the house than the flat. Get your sexy flat now and show it off to your mates but repent at leisure.

I've already shown that a £100,000 mortgage costs £208 per month interest only at 2.5% but what if your service charges on the swanky flat are also £208 per month ? You would effectively be paying for an extra £100,000 of borrowing which you could be using to generate income, not pay service charges. In that is the real crux for swanky flats.

A final nail in the service charge coffin is the fact that flats need the building up of a sinking fund. This is a large fund to cover wholesale repairs and maintenance to the building. No-one will want to talk about this as many flats are terribly underfunded in this area and new ones certainly are. Either you get a call in 7 years for £5000 or more each or you pay an extra £500/1000 a year from day one. Flats are great but houses are streets ahead in almost every case.