Mortgage rates going up

ILW

ess0two wrote: »

You dont half make some assumptions,what extra cash.

The cash not having to be paid on a mortgage.

RenovationMan

Emy1501 wrote: »

With no other debts 3.5x joint or single is probably reasonable. Mortgages now a days take into account lifestyles now though so any regular commitments will have to be considered.

Man #1 on £65k - @3.5x = £227,500 @5% = £1345 pm mortgage.
Man #2 on £25k - @3.5x = £87,500 @ 5% = £517 pm mortgage.

Food bill is £300pm for both, utility bills are £200pm for both, travel costs to and from work are £70pm for both.

Man #1 after tax = £4083 pm. After outgoings = £2168 left over.
Man #2 after tax = £1824 pm. After outgoings = £737 left over.

Man #1 proportion of income spent on Living costs: 47%
Man #2 proportion of income spent on Living costs: 60%

Conclusion: That food, utilities, travel expenses do not increase proportionally with income and so someone on a higher salary has a much higher proportion of disposible income left at the end of the month than someone on a lower salary.

The 3.5x salary mortgage multiple results in someone on a lower salary taking on much more financial risk than someone with a higher salary. Fundamentally this seems wrong to me. I'd suggest a calculation that based the maximum salary as a PROPORTION of income rather than as a MULTIPLE of income, which woud be much fairer and much safer all around.

ILW

Surely the best equation is a multiplier of income after a fixed overhead has been deducted. Some banks are doing this amongst howls from people saying how unfair it is that the family with 4 kids cannot get a mortgage as big as the family with only one child.

Graham_Devon

RenovationMan wrote: »

Man #1 on £65k - @3.5x = £227,500 @5% = £1345 pm mortgage.
Man #2 on £25k - @3.5x = £87,500 @ 5% = £517 pm mortgage.

Food bill is £300pm for both, utility bills are £200pm for both, travel costs to and from work are £70pm for both.

Man #1 after tax = £4083 pm. After outgoings = £2168 left over.
Man #2 after tax = £1824 pm. After outgoings = £737 left over.

Man #1 proportion of income spent on Living costs: 47%
Man #2 proportion of income spent on Living costs: 60%

Conclusion: That food, utilities, travel expenses do not increase proportionally with income and so someone on a higher salary has a much higher proportion of disposible income left at the end of the month than someone on a lower salary.

The 3.5x salary mortgage multiple results in someone on a lower salary taking on much more financial risk than someone with a higher salary. Fundamentally this seems wrong to me. I'd suggest a calculation that based the maximum salary as a PROPORTION of income rather than as a MULTIPLE of income, which woud be much fairer and much safer all around.

Man one has more to save for a deposit then. More to put down on the house.

RenovationMan

Graham_Devon wrote: »

Man one has more to save for a deposit then. More to put down on the house.

We're talking about salary multiples not deposits. I don't see what your point is.

wotsthat

Graham_Devon wrote: »

And that period of time is a different period of time to the period we are about to live through.

You are basing your assumptions of not having to prepare for higher rates on times gone by.

What you are suggesting is extremely bad advice. Gambling in fact. It's exactly the same as what Ray Boulger suggested in 2006....to get the biggest interest only mortgage you possibly can and switch mortgage in 2-3 years. Those people are now screwed. May have worked 5 years previously.

I'm not saying the future is going to be the same as the past but history suggests that 8% mortgage rates are rare. When do you think we'll see typical mortgage rates of 8%? Let's say that it'll be in 5 years time - long enough for someone to buy themselves a nice house, get some debt paid down and try and improve their income at the same time?

I take slight issue with your Ray Boulger comment. I'm not suggesting that people take the biggest possible mortgage and go IO. That's clearly asking for trouble.

I'm simply suggesting your approach (and mine as it turns out) has been too cautious. I'm now looking at £81,000 premium to move up to a 4 bed detached instead of £38,000 in 1999. The irony is that if I'd been a 'debt junkie' I would more financially secure and sat in a bigger house and easily affording the repayments even at 8%. I don't know how old you are but I'd bet you would have been better off by being a 'debt junkie' too.

DervProf

I think that lending based on salary multiple is probably the fairest option.

If maximum lending were to be calculated on proportion of income, then the property market would become more "stretched" at the top end. If a someone on a relatively low salary (£25K) can afford to maintain a (3.5x) mortgage and pay the bills, then there is no need to change the maximum lending calculation. Yes, someone on a relatively high salary (£60K+) could probably manage a larger mortgage than 3.5x their salary, but I'm pretty sure that this will lead to an increase in prices of higher end properties.

No wonder those on higher salaries want to be able to borrow more (or others to borrow more). Those that are already buying, or have bought a larger property would almost certainly benefit from being able to demand a higher price if lending criteria were "relaxed" for higher earners.

I say keep (3.5 - 4 x) income multiples for the calculation of maximum lending. Any increase in the maximum amount people can borrow will simply fuel HPI, which in turn will lead to future calls for further increases in maximum lending levels.

shortchanged_2

The only problem with your system RenoMan is that it will result in an ever widening gap in the price of houses at the lower end to those in the upper end, so potentially the opportunity to climb the ladder will become more and more difficult. Sort of what's happening now in a way.

DervProf

The other issue to consider is that if a high earner were to be able to borrow an (larger than currently allowed) amount which left enough for other living costs + a margin, then it would leave them in a vulnerable situation were they to lose their job or suffer a drop in income. It would also make them more exposed to an increase in interest rates. Obviously, an increase in rates will make a more significant difference to monthly mortgage payments is a larger mortgage is taken out.

I can see that plenty of people on high salaries could easily manage larger mortgages, but is that reason enough to change lending criteria ? And is there a real need to change the criteria ?

shortchanged_2

Sorry RenoMan, I have to ask you but what is the point of your idea?

Why would you want people to pay more for houses?

It is well known that access to credit is one of the main drivers of house prices as seen in the previous decade. So basically your system just encourages high HPI.

Capped income multiples mean more chance of a level playing field i.e if you earn more and are not reckless with money then you will still be able to afford that bigger house which is how it should be. I don't think you will find many people who would argue against that.