What %age of salary should go towards monthly mortgage payment

urgurinder

Hi all

I am thinking of buying a house and as part of he process, thinking about how much i can afford per month. The difficult thing is that we have just had our first child and not sure how much should i budget for child expenses. If it was only me and wife, I would have tied 50% of my monthly income to mortgage. I have done some googling and the number i seem to be getting from american articles/discussion forums is 25-35%. What's your opinion. What %age of your salary goes towards monthly mortgage payment.

Degenerate

I wouldn't look at percentages, what you can afford for housing does not change in proportion to you income because your non-housing living costs remain the same. You need to do the maths based on your individual costs and leave a good safety margin.

CabSave

[FONT=&quot]Rule of thumb currently promoted is that you should never spend more than 1/3 of your gross income. 33.3%. But you should be aware that this is far higher than the historic average. Up until 20 years or so ago, the rule of thumb was 25%, and many critics point to this change as one reason so many Americans are over-leveraged.[/FONT]

notbritishgas

CabSave wrote: »

[FONT=&quot]Rule of thumb currently promoted is that you should never spend more than 1/3 of your gross income. 33.3%. But you should be aware that this is far higher than the historic average. Up until 20 years or so ago, the rule of thumb was 25%, and many critics point to this change as one reason so many Americans are over-leveraged.[/FONT]

I can vouch for that figure.
In the mid sixties banks/building societies were choosy who they lent money to and made sure the loan could be repaid. The rule of thumb was that the monthly mortgage repayment should not be more than the weekly wage, hence approx 25%. Part of the wife's wage was taken into account, 50% I think.
If you do not want to get into financial difficulties in the future then that figure is one to look at.

sweetilemon

Its hard to give a solid answer as it depends on many factors. 25% is good grounds but if your wife has an income i would say 25% of her income also but variables such as how much you earn, your outgoings like phone tv internet gym memberships obviously all reduce the money left over to spend on food nappys and other essentials. dont forget to include council tax, gas + electric and home + contents insurance in your budget. It would help if you know how much you already pay for rent and how well you cope with the payments. goodluck.

Milarky

I think you should work backwards - asking what amount you should consider borrowing. Divide that figure by 11. That is amount you should be paying (and be able to carry) through interest rate highs and lows. The percentage of salary is then related to the multiple the lender will allow.

Example

£150k mortgage. 1/11th (9%) is £13,500

£120k mortgage 1/11th is £10,800

£100k mortgage 1/11th is £9,000

If you think these figures seem implausibly high, they are meant to! People need to think about repayment of borrowing in a realistic time-scale and not simply servicing the interest-rate.

Let's turn this around and ask: how much can be borrowed (and repaid) over 25 years at various like interest rates

7% - 11.65 x annual repayment

6% - 12.78 x annual repayment

5% - 14.09 x annual repayment

So my 'rule of thumb' works on the basis of interest rates up to 7% - which might seem quite high - but even at 5% the required 'level' (i.e. not increasing with rising income) still only applies a borrowing to payment multiple of about 14.

An objection to this rather quaint view that repayments should be set to repay the loan (not simply cover interest-servicing) is "oh, but my income won't stay at this level - I can afford a higher level of repayments [i.e. bigger borrowing multiple] in a few years - what's all the fuss about?" But let's look at what people have actually done in practice - they've just gone out and borrowed even more after a few years - just as their pay rises would have made an initially crippling level of borrowing affordable. 'Affordable' simply means the buyer is delusional - because it shifts the focus from repayment (and 'building up an asset') to maintaining a lifestyle on levels of debt.

[Anyway, just my two-pennies-worth...]