MSE News: Interest-only mortgages could be 'thing of the past'

RenovationMan

gingeralan wrote: »

Check post 70 that's where I got the suggestion of 260k from.

I have stated that their needs to be an absolute limit which may be subject to further reduction. I have issues with the affordability ideas mentioned so far as the idea presumably is that these people wanna borrow more than 3.5x for some reason. Otherwise they would surely agree an absolute limit based on earning should exist, no?

Sorry missed that one, I thought you were saying I had suggested £260k. Apologies.

So what you seem to be proposing is using affordability as the criteria but with a maximum lending cap of 3.5 x salary?

I guess the next question is why 3.5 and not 3 x salary or 4 x salary? What's the financial basis of that decision?

gingeralan

RenovationMan wrote: »

Sorry missed that one, I thought you were saying I had suggested £260k. Apologies.

So what you seem to be proposing is using affordability as the criteria but with a maximum lending cap of 3.5 x salary?

I guess the next question is why 3.5 and not 3 x salary or 4 x salary? What's the financial basis of that decision?

It seems a reasonable figure. Around a third of take home pay is what it works out as roughly in most circumstances. Again this figure may be subject to additional restriction but I am sure that will work as it has for many years.

RenovationMan

gingeralan wrote: »

It seems a reasonable figure. Around a third of take home pay is what it works out as roughly in most circumstances. Again this figure may be subject to additional restriction but I am sure that will work as it has for many years.

Then instead of having a cap at 'roughly' a third of take home pay, why not put that into the affordability rule and have it capped at exactly a third of take home pay?

JimmyTheWig

gingeralan wrote: »

I have stated that their needs to be an absolute limit which may be subject to further reduction.

Further reduction based, presumably, on affordability? Then we're all in agreement.
Obviously there must be a maximum limit for any given salary - that being what is affordable for someone on that salary with no commitments. I presume that we're all in agreement here, too.

The only potential disagreement, which hasn't really been discussed, is how to measure affordability.
I'm not convinced that someone earning £30k can afford half the mortgage that someone earning £60k can as if the £60k person is living frugally then the £30k person couldn't live on half that spending.
It's also got to be done on net income rather than gross income. If the government change the income tax rules / levels then this will surely affect what people can afford to borrow.

But as I say, by and large I think we're all in agreement on this.

gingeralan

JimmyTheWig wrote: »

Further reduction based, presumably, on affordability? Then we're all in agreement.
Obviously there must be a maximum limit for any given salary - that being what is affordable for someone on that salary with no commitments. I presume that we're all in agreement here, too.

The only potential disagreement, which hasn't really been discussed, is how to measure affordability.
I'm not convinced that someone earning £30k can afford half the mortgage that someone earning £60k can as if the £60k person is living frugally then the £30k person couldn't live on half that spending.
It's also got to be done on net income rather than gross income. If the government change the income tax rules / levels then this will surely affect what people can afford to borrow.

But as I say, by and large I think we're all in agreement on this.

The main issue is that the more complicated the affordability criteria the easier it it's to fudge the figure to borrow more. I have seen it happen. For example if someone has a finance deal with less than 6 months to run it is ignored, even if this was a large percentage of their pay. There are many other such examples which if you wish you could research.

I do think that someone on 60k would probably be comfortably able to afford twice that of someone on 30k. Extra tax payable and additional expenses due to cutting ones cloth to fit.

While a have some common ground I do not see why there is a problem with an absolute cap on the asking borrowed, the payment as a percentage of earning is at risk of interest rate fluctuations. Maybe it should be only 3x wages, this would work well to bring houses back down to more affordable levels.

RenovationMan

gingeralan wrote: »

The main issue is that the more complicated the affordability criteria the easier it it's to fudge the figure to borrow more. I have seen it happen. For example if someone has a finance deal with less than 6 months to run it is ignored, even if this was a large percentage of their pay. There are many other such examples which if you wish you could research.

I do think that someone on 60k would probably be comfortably able to afford twice that of someone on 30k. Extra tax payable and additional expenses due to cutting ones cloth to fit.

While a have some common ground I do not see why there is a problem with an absolute cap on the asking borrowed, the payment as a percentage of earning is at risk of interest rate fluctuations. Maybe it should be only 3x wages, this would work well to bring houses back down to more affordable levels.

I'd argue that someone on £60k could afford more than twice as much as someone on £30k. A lot of the expenses are the same for both people, such as gas, electricity, water, food, clothing, travel costs. Someone on £30k could spend 50% of their income on these necessities whereas someone on £60k might be spending 25% of their income on the same things.

Just because you earn more, it doesn't mean that you use more electricity or your commute to work costs more. This is the reason I think that affordability rather than salary multiples is a better way to decide on what to lend someone.

I'm happy with capping loans, but feel that the cap should be calculated within the affordability calculation, based on disposible income and not an arbitrary amount based on gross salary.

gingeralan

RenovationMan wrote: »

I'd argue that someone on £60k could afford more than twice as much as someone on £30k. A lot of the expenses are the same for both people, such as gas, electricity, water, food, clothing, travel costs. Someone on £30k could spend 50% of their income on these necessities whereas someone on £60k might be spending 30% of their income on the same things.

Just because you earn more, it doesn't mean that you use more electricity or your commute to work costs more. This is the reason I think that affordability rather than salary multiples is a better way to decide on what to lend someone.

I'm happy with capping loans, but feel that the cap should be calculated within the affordability calculation and not an arbitrary amount based on gross salary.

An imposed restriction on lending based on disposible income will not prevent small lenders entering the market with their own affordability criteria to lend more money to people who can't afford it. An income multiple is an absolute, no questions asked limit. No way to fudge it no quibble. If you cannot borrow what you need to buy the house you want, take some time save up a larger deposit so you don't need to borrow asmuch in the first place.

Affordability on the basis you seem obsessed by is open to plenty of abuse through creative accounting. What us considered an expense what is considered a luxury?

A thought would be if an individual has an aeroplane, that is a real luxury, but had many expenses that are unavoidable, hangarage maintenance needs to be paid. Would these be included? What ifs first time buyer who had no contracts for sky, mobile or anything else, what if that first time buyer was going to get a fully loaded sky subscription etc. borrow money for home improvements. You cannot predict what someone will spend later, income multiples are the way to go.

JimmyTheWig

gingeralan wrote: »

The main issue is that the more complicated the affordability criteria the easier it it's to fudge the figure to borrow more. I have seen it happen. For example if someone has a finance deal with less than 6 months to run it is ignored, even if this was a large percentage of their pay. There are many other such examples which if you wish you could research.

But there is no way that someone could engineer a situation where they could "afford" more than someone with their income and no committments. (Unless they lie about their income, but that would be a problem regardless.)

I do think that someone on 60k would probably be comfortably able to afford twice that of someone on 30k. Extra tax payable and additional expenses due to cutting ones cloth to fit.

I agree. They'd be able to afford more than twice what the £30k earner could afford. So if you set the multiple correctly for a £60k earner then you will be overstretching a £30k earner.

While a have some common ground I do not see why there is a problem with an absolute cap on the asking borrowed, the payment as a percentage of earning is at risk of interest rate fluctuations. Maybe it should be only 3x wages, this would work well to bring houses back down to more affordable levels.

Lets say this was agreed.
Then the government increased taxes.
People's gross salaries wouldn't change but their take home pay would drop. They then wouldn't necessarily be able to afford what was previously thought to be affordable on their gross income.


Though are you saying that this should be a law? And the reason for this law would be to bring house prices down?
Interesting.

gingeralan

JimmyTheWig wrote: »

But there is no way that someone could engineer a situation where they could "afford" more than someone with their income and no committments. (Unless they lie about their income, but that would be a problem regardless.)


I agree. They'd be able to afford more than twice what the £30k earner could afford. So if you set the multiple correctly for a £60k earner then you will be overstretching a £30k earner.


Lets say this was agreed.
Then the government increased taxes.
People's gross salaries wouldn't change but their take home pay would drop. They then wouldn't necessarily be able to afford what was previously thought to be affordable on their gross income.


Though are you saying that this should be a law? And the reason for this law would be to bring house prices down?
Interesting.

I think that is what needs to happen to reduce the debt burden. Everyone had borrowed too much, and I think this is down to lax lending practices allowing propel to borrow more and more.

stopping i/o mortgages and capping lending based on income really needs to be done, anything else is open to abuse. House price inflation is not wealth! Add I have stated I bought around a month ago. I would be fine for prices to drop as it means should I wish to move to a larger property the step up will be smaller. I am repaying my mortgage quickly so unless e get a 50% drop overnight I shouldn't suffer with negative equity issues.

gingeralan

JimmyTheWig wrote: »

But there is no way that someone could engineer a situation where they could "afford" more than someone with their income and no committments. (Unless they lie about their income, but that would be a problem regardless.)


I agree. They'd be able to afford more than twice what the £30k earner could afford. So if you set the multiple correctly for a £60k earner then you will be overstretching a £30k earner.


Lets say this was agreed.
Then the government increased taxes.
People's gross salaries wouldn't change but their take home pay would drop. They then wouldn't necessarily be able to afford what was previously thought to be affordable on their gross income.


Though are you saying that this should be a law? And the reason for this law would be to bring house prices down?
Interesting.

There are ways to make someone with no commitments borrow the same as someone with, what is a commitment? This is open to so many interpretations. Food? No just eat less, heating? No just put a coat on, car? Why do you need one? walk it's much better for the environment. Creative accounting is all about this sort of thing, trying to classify things in different ways for certain economic goals. If someone wants to borrow loads it would be quite possible to manipulate their expenses or income for the better using affordability reasons