260k mortgage on 65k salary doable or silly?

Notmyrealname

Louisdawg wrote: »

Hi All

As above really - do you think it's acceptable/usual/bit tight or crazy.

Ridiculously stupid.

If the BoE rate rises 1% and your monthly mortgage payment rises, it adds £142 a month on repayment, £210 on interest only. A rise of 4% would wipe out the £1000 a month you are calculating you'd have after paying a mortgage at the current BoE base rate leaving you nothing to live on.

Once the recovery gets well underway I'd be surprised if there's not a 2% rise over a 3 year period.

There was a good reason that the rule used to be 3.5x income and that was to allow leeway for mortgage interest rate rises.

And if you're currently on an interest only mortgage and will be moving to another interest only then its even more stupid because you might as well be renting.

RenovationMan

Notmyrealname wrote: »

Ridiculously stupid.

If the BoE rate rises 1% and your monthly mortgage payment rises, it adds £142 a month on repayment, £210 on interest only. A rise of 4% would wipe out the £1000 a month you are calculating you'd have after paying a mortgage at the current BoE base rate leaving you nothing to live on.

How do you work that out? An interest only mortgage is just a repayment mortgage with the repayment portion removed, so it'd be lower per month, not higher. Both will rise by the same amount if rates increase. If the OP is worried about rates rising, they can always get a long term fixed rate - there are some good deals out there at the mo.

Notmyrealname wrote: »

Once the recovery gets well underway I'd be surprised if there's not a 2% rise over a 3 year period.

There was a good reason that the rule used to be 3.5x income and that was to allow leeway for mortgage interest rate rises.

Fixed rate mortgages sort this out. The 3.5 x income rule doesn't work because two people on the same salary get the same sized mortgage, even though one might be a spendthrift with massive debts and the other completely debt free. Much better to look at affordability not an arbitrary figure based on GROSS salary.

Notmyrealname wrote: »

And if you're currently on an interest only mortgage and will be moving to another interest only then its even more stupid because you might as well be renting.

Except that IO mortgages give you security of tenure of 25 years or more, whereas renting gives you security of tenure for 6 months. Any gains on the house price over the 25 years, which could be significant goes into your pocket instead of the landlord's and at the end of the 25 year you can walk out with a tax free lump sum to either buy a smaller house outright or invest the money and use the interest to pay/subsidise the rent.

Notmyrealname

Fixed rate mortgages only last so long and when they end if you can't get another, you're stuck. And if you can get another you usually have to pay fees.

The 3.5x income rule DOES work. It worked fine for decades and as soon as they threw it out the window, people ended up in trouble.

An IO mortgage is only a 25 year secure tenure if you don't lose your job.

RenovationMan

Notmyrealname wrote: »

Fixed rate mortgages only last so long and when they end if you can't get another, you're stuck. And if you can get another you usually have to pay fees.

You pay fees for all sorts of mortgage deals, both IO and repayment so I'm not sure what your point is here.

Notmyrealname wrote: »

The 3.5x income rule DOES work. It worked fine for decades and as soon as they threw it out the window, people ended up in trouble.

If it worked fine, then why did they change it (TBH, there never was a 3.5x income rule, but I'll play along).

Example.

Two twins, Bill and Ted. They both work at the same factory and earn a £35k salary. After tax, they both receive £2000 per month net. They both inherit enough money for a deposit & moving costs.

Bill has no debt and £5k in savings. Ted has a £9k credit card debt, £15k car finance in place and £5k store cards debt and no savings. This amounts to £617 per month in debt repayment, paying the minimum off his cards each month.

Both are loaned £122,500 at a bank that uses your 3.5 x salary criteria. At 5% rates, this equates to £724 per month. Both twins eat the same amount of food, hav the same council tax and have the same utility bills. Their monthly costs are £500.

After mortgage and all other outgoings, Bill has £776 per month left.
After mortgage and all other outgoings, Ted has £159 per month left.

If rates rise, which twin will be safe? I hear you say "Bill", but hang on, I thought using salary multiples should make both safe?? What is going wrong?!!! :eek:

Notmyrealname wrote: »

An IO mortgage is only a 25 year secure tenure if you don't lose your job.

Whereas your landlord pays your rent for you until you're back on your feet. Out of the goodness of his heart?

movilogo

£260k on £65k income is not a problem under normal circumstances (assuming one is applying due diligence for other expenses).

However, one need to have some good backup plan if made job less for few months.

Wobblydeb

It sounds very tight to me, but then I'm rather more risk averse.

Three things jump out .... firstly I think you are massively under-estimating your costs. From the big irregular spends like replacement car / washing machine / boiler to the small irregular spends like haircuts / clothes.

Secondly, how good is your pension provision? If you have been paying into a pension for a while and/or your employer contributes a good chunk then it should be fine. Otherwise I would rethink that figure.

Finally I would include income protection insurance. I think in your situation (reliant on sole income and a small child to consider) the money spent would be worth the peace of mind.

Otherwise if your missus stands a good chance of going back into work, and her salary will adequately cover childcare costs, then stretching yourself now for a forever home may not be a bad idea

de1amo

i have learnt that since i have been married(6years) my budget/saving ratio has been doomed because as kids grow up they suck up any money faster than a hoover!

FBaby

You need to take into consideration what your lifestyle might be like in 5-10-20 years time. As de1amo states, you have a small baby now, won't you want a second or third one? You might think not now but feel differently in a couple of years. If your wife goes back to work, will you have childcare costs? Remember that you won't be entitled to any tax credits, so you might find it not cost effective for your wife to go back, especially if you plan a 2nd child.

Babies are relatively cheap, children less so, teenagers are very expensive!!! There are a lot of small costs that built up. When there are little, shoes that need changing two or three times a year, presents for all the birthdays they will be invited to, birthday parties, activities costs, then you have the school trips, the school meals... all these are not in your budget now, but will need to be in a few years time.