what interest rate to consider to check personal affordability

xyz123

Happy new year to all.

The interest rates are quite low and will increase at some time in next few years. As per subject, what interest rates should one consider while determining if the mortgage payments are affordable. Is 5% reasonable?

opinions4u

I'd suggest making sure you can still feed and clothe yourselves while paying a mortgage with a 10% rate.

A typical mortgage term is 25 years. I paid 15.4% in 1991.

Great question to ask. Be prepared. Rates fell 5% in well under a year. Could you cope with the shock of such a change in the other direction?

katejo

opinions4u wrote: »

I'd suggest making sure you can still feed and clothe yourselves while paying a mortgage with a 10% rate.

A typical mortgage term is 25 years. I paid 15.4% in 1991.

Great question to ask. Be prepared. Rates fell 5% in well under a year. Could you cope with the shock of such a change in the other direction?

The highest I have ever had to pay (since 1993) has been 6% but it probably would be safer to allow for 10%

beecher2

I'd agree with being able to afford 10% at a push. My mortgage started off at 8% and at the time that was seen as a low rate.

HappyMJ

I would use 6% as the highest base rate rate possible for the next 5 years. It's a guess really. After 5 years your income should have risen so any higher than 6% should be affordable by then. You might end up with a very bare lifestyle but as long as no more than 50% of your income is going on the mortgage and as long as all the basic expenses are covered then you should be OK.

opinions4u

HappyMJ wrote: »

I would use 6% as the highest base rate rate possible for the next 5 years. It's a guess really. After 5 years your income should have risen so any higher than 6% should be affordable by then.

In the recent past I'd have agreed with you.

But in a low inflation (which it will be if growth is low) cost cutting environment where pension funds are under pressure I'm not so sure.

As those in the public sector are finding, a pay freeze for two years followed by a pay cap of 1% for a further two years doesn't really help your spending power. Add in a 3% increase in mandatory pension contributions and these people have lower take home pay. And that's before you overlay the impact of inflation on the rest of the household budget.

I don't expect to see the private sector pay awards allow incomes to progress with any great significance either.

Additionally, in the context of a FTB mortgage, the average time for producing offspring is 2-5 years in to the thing!

Thrugelmir

What interest rate are you paying at the moment?

At the moment the market has lost uniformity with individual borrowers on a wide spectrum of interest rates and terms.

xyz123

Thanks for your replies. I am not paying mortgage at the moment but wanted to get an idea as to what to afford.

Both of us are working at the moment. I would like to see if i can afford the mortgage only one my salary, in case something happens to OH salary.

I have seen the 50% of salary as a barometer, mentioned few times. Is that normally based on total salary or do people consider only one salary?

Thrugelmir

xyz123 wrote: »

I have seen the 50% of salary as a barometer, mentioned few times. Is that normally based on total salary or do people consider only one salary?

Depends on your income and outgoings. A third, 33% would be a better bench mark as a general guide.