How far to stretch

pdarc

Hi all:

Hoping for some advice related to how far people think might be reasonable to stretch on a mortgage on my next move.

Also wondering what sort of back ups are in place if someone was not able to pay their mortgage, just in case it happens, I'd like to know what is typical.

I realise much of the first question will come down to inclination to risk and lifestyle choices but hoping to get different view points.

My situation is straightforward: 30 years old, live in outer London, married with two very young children, work full time, relatively new job, all is going well. We just paid off our mortgage, credit history is good, but we have run out of space in our little home and need more space as well as hopefully get into an area with good schools for when the little ones get a bit older.

We are thinking of moving to a home which will likely cost ~double the value of our current home. LTV 50%.

Based on 5% interest rate and 25 year repayment term...

The repayment loan will represent about 35% of the household income (after taxes)
Then we are estimating another 40% is household and living costs.
That leaves us with 25% for savings/buffer.

If interest rates are 10%
Loan 55%, living 40%, 5% buffer/savings.

How does that stack up against others on the forum?
The 10%+ interest rate scenario would be worrying, if it happens at some point in the future.
Or perhaps people think it might be reasonable to stretch further?

What would happen if for some reason in the future I become unemployed for a period of time, what generally happens? Are lenders flexible with re-structuring a mortgage?

Thanks

Building_Surveyor

How far you stretch yourself is up to you depending on the lifestyle you lead. The lender is interested in affordability, whether you meet their criteria. I personally would not go over 25% of my monthly income for mortgage payments regardless of if the bank wanted to give me more. But I like to go on a few holidays a year, and have outgoings that could change like childcare costs.

Thrugelmir

What would happen if for some reason in the future I become unemployed for a period of time, what generally happens? Are lenders flexible with re-structuring a mortgage?

Onus is on you to manage your money.

Do you emergency savings that would cover 6 months outgoings?

What sort of flexibility would you expect from a lender?

pdarc

Thrugelmir wrote: »

Onus is on you to manage your money.

Do you emergency savings that would cover 6 months outgoings?

What sort of flexibility would you expect from a lender?

Hi:
I was hoping the banks would allow agreed payment break, or perhaps to switch to interest only for a while and then when back in employment to switch back to repayment...
Totally agree that 6 months savings is a must.

japmis

The general rule of thumb is that mortgage payments shouldn't be more that 1/3 of your take home pay; anything over this and you may be stretching yourself.

silvercar

japmis wrote: »

The general rule of thumb is that mortgage payments shouldn't be more that 1/3 of your take home pay; anything over this and you may be stretching yourself.

Surely that depends on income, the higher the income the more disposable cash you have.

If the worst happened and you had no savings and were claiming benefit, you could claim SMI (support for mortgage interest). It is restricted to a limited time and the interest only and "only" the interest on the first £200k. google SMI for more info.

A lot of lenders would be prepared to allow you to move to interest only for a short time, but nothing is guaranteed. Another option would be to take an interest only mortgage and make regular overpayments equal to the capital amount, effectively guaranteeing an interest only mortgage if you needed it.

japmis

silvercar wrote: »

Surely that depends on income, the higher the income the more disposable cash you have.

Yes that's why it's calculated as a fraction.

Whether you're a millionnaire or on minimum wage, the rule of thumb is still 1/3 of your take home pay is deemed manageable for rent/mortgage payments.

silvercar

japmis wrote: »

Yes that's why it's calculated as a fraction.

Whether you're a millionnaire or on minimum wage, the rule of thumb is still 1/3 of your take home pay is deemed manageable for rent/mortgage payments.

I disagree. If it is possible to have housing costs of say 20k and you earn 60k, then you can cope with housing costs of 50k if you earn 100k. If you needed to as your remaining money will be more in absolute terms. At the other end of the scale, if your housing costs were 5k I doubt you could survive on earning 15k.

michaels

silvercar wrote: »

I disagree. If it is possible to have housing costs of say 20k and you earn 60k, then you can cope with housing costs of 50k if you earn 100k. If you needed to as your remaining money will be more in absolute terms. At the other end of the scale, if your housing costs were 5k I doubt you could survive on earning 15k.

I'm with you on this one SC. Whilst it is true that on a higher income you are likely to be ably to support a more luxurious lifestyle you wouod still have the option of cutting back to a 'bare minumum' level of expenditure if need be little different from someone who normally earned half as much.

Even standard living costs are unlikely to increase at the same rate as income for example would you spend twice as much heating your home if your income was double?

japmis

Wish I'd never spoken!!! It's only a rule of thumb!!!

Speaking to people in RL and on this board, most people have said if your take home pay is £1500 a month then your rent/mortgage shouldn't be more than £500.

japmis

What would you recommend the poster then, silvercar and michaels?