5 times salary!

w00519772

I am a first time buyer. HSBC say they will lend me five times my salary. On that basis they will lend me 175000. I have a 30,000 deposit. On that basis I could afford 205,000.

I have found a house I like for 175,000 but that still seems to much. There are houses in the area for 149,000, which would mean HSBC lending me 3.5 times my salary.

What is a comfortable and realistic salary multiple? 3.5 times seems too cautious and 5 times seems too adventurous. Is there another calculation I could use to calculate a budget that it not too cautious and not to adventurous?

sandsni

They might well lend you 5 times your salary, but if interest rates go up, which they eventually will, would you be able to afford the repayments on such a mortgage?

The best calculation, IMHO, is what you can actually afford to pay out each month while still having enough to feed and clothe yourself, heat your property, plus pay for any maintenance or repairs that will inevitably occur once you own a property. Calculate that then work backwards.

HAMISH_MCTAVISH

w00519772 wrote: »

What is a comfortable and realistic salary multiple? 3.5 times seems too cautious and 5 times seems too adventurous. Is there another calculation I could use to calculate a budget that it not too cautious and not to adventurous?

Forget salary multiples.

They're a pointless and outdated way of doing things.

Sticking to 3.5 times income was prudent when there was a realistic chance of rates going to 15%+ during the unusually high rates suffered in the 70's to 90's....

Just like building a bomb shelter in your garden was prudent during the unusually high occurrence of German Bomber attacks in the 1940's....

Neither of those scenarios are realistic today.

Calculate a monthly mortgage payment you'd be comfortable with and see what that gets you in a mortgage calculator at the current offered rate, then also at much higher mortgage rates like 4%, 5%, 6%, etc.



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katejo

w00519772 wrote: »

I am a first time buyer. HSBC say they will lend me five times my salary. On that basis they will lend me 175000. I have a 30,000 deposit. On that basis I could afford 205,000.

I have found a house I like for 175,000 but that still seems to much. There are houses in the area for 149,000, which would mean HSBC lending me 3.5 times my salary.

What is a comfortable and realistic salary multiple? 3.5 times seems too cautious and 5 times seems too adventurous. Is there another calculation I could use to calculate a budget that it not too cautious and not to adventurous?

Personally I would never go above 3.5 times. My current mortgage is down to slightly under 2 x now. If interest rates returned to 5%, the mortgage and unavoidable bills like gas/electricity etc. would use up half my month's take home pay.

HAMISH_MCTAVISH

katejo wrote: »

Personally I would never go above 3.5 times. My current mortgage is down to slightly under 2 x now. If interest rates returned to 5%, the mortgage and unavoidable bills like gas/electricity etc. would use up half my month's take home pay.

Much of that depends on income though.

Hence why blunt multiples are pointless and outdated.

As someone with take home pay of 10K a month requires a much lower percentage of it to live on than someone who takes home 1K a month.

And someone who earns 100K a year can find a house for 3.5 times income rather easily almost everywhere, whereas someone who earns 20K a year might struggle almost anywhere.

It's all about affordability.

Not salary multiples.

moneyistooshorttomention

Personally, I went for about 3.25 times my salary back when I bought my starter house over 20 years ago and that was pushing it.

There will, almost certainly, be unexpected expenses involved in buying this house (ie stuff the vendor knew very well needed to be done, but omitted to mention).

I would be wary of going over 3 times salary myself (and that's before the current 2013 "goodness knows what will happen" scenario we are all in right now).

In 1980s Society, I stretched like mad to about 3.25 times my salary and it was pushing it. In 2013 Society I would probably feel very very uncomfortable about going for over twice my salary personally.

.....but then I personally like to be in a position where if it all went belly up I could categorically state "It wasn't my fault gov....I was thoroughly provident and careful". With a multiple of over 3 times salary it would look like/might be your fault if it all went "belly up".

jamie11

I was fortunate enough that when 'Black Monday' came round I was self employed and much in demand, so that I could price my work to take extra costs into account, and I did, but there were millions on fixed salaries that suffered and lost their homes. It wasn't pretty and I hope it never happens again, but 5x salary to get a mortgage just seems stupid, rates are bound to rise, what you pay today if you have one will be a pittance when the rates do rise, they are almost certain to rise to a B of E rate of 4.99% or more plus the extra the bank sticks on it within 10 years.

seriousDFW

moneyistooshorttomention wrote: »

Personally, I went for about 3.25 times my salary back when I bought my starter house over 20 years ago and that was pushing it.

There will, almost certainly, be unexpected expenses involved in buying this house (ie stuff the vendor knew very well needed to be done, but omitted to mention).

I would be wary of going over 3 times salary myself (and that's before the current 2013 "goodness knows what will happen" scenario we are all in right now).

In 1980s Society, I stretched like mad to about 3.25 times my salary and it was pushing it. In 2013 Society I would probably feel very very uncomfortable about going for over twice my salary personally.

.....but then I personally like to be in a position where if it all went belly up I could categorically state "It wasn't my fault gov....I was thoroughly provident and careful". With a multiple of over 3 times salary it would look like/might be your fault if it all went "belly up".

Why is 3 the salary multiplier cut-off where a borrower will go from being provident to reckless? Seems rather arbitrary to me.

moneyistooshorttomention

Yeh...I know...and just where does the "provident" or "hoping for the best" mark go.

Back in my day the norm was 2.5 times multiple and hence I was pushing it a bit at 3.25 times my income ...but I honestly truly knew my own "capacity/ability" in that respect.

5 times is asking for trouble imo. Come to think of it 4 times even is asking for trouble. If trouble comes then there will be a LOT of people who think "Flew too close to the flame and got burnt" and wont even sympathise.

There IS a point beyond which Society will think "pushed it too far" and wont even sympathise if the person gets "burnt" and I would say it comes at over that 3 times multiple personally imo.

It would take a VERY exceptional person to manage to service a debt level that high at any time and, even more so, in 2013. OP may be "very exceptional"....but, then again, a lot of people think they are exceptional or very exceptional and/or safe from "getting burnt" and most of them are wrong.....

lessonlearned

Straight salary multiples are a very simplistic measurement.

Just because a lender says they are prepared to lend you 5 x salary doesn't necessarily mean that you would be comfortable.

As Hamish points out a better yardstick would be "affordability" - both now and in the foreseeable future.

You would be better looking at your LTV - Loan to Value as a percentage. The lower the loan in relation to the value of the property the better.

The more deposit you can put down the better deal you will get, ie lower interest rates. If you can you should look at least a 20% deposit.

If your £30K were to represent a deposit of 20% then you should buy a house at around £150K.

Not only will a 20% deposit give you a better deal with regards to lower interest rates it also gives you some protection against going into negative equity should house prices fall.

This could be crucial if you need to remortgage when any current deal or fixed rate product you may choose comes to an end.

My sons are both FTB's and with a little bit of help from yours truly we have stuck to the 20/80 rule.

Interest rates are currently at an all time low and have been for some time. Sooner or later they will rise again, although hopefully not to the levels we endured during the 80's and 90's. At one point they reached an eye watering 15%.

A lot of people lost their homes.

One thing I would strongly recommend you do is to make sure you take out stand alone Income Protection insurance.

You may feel your job is secure enough to take on a mortgage, however you never know what may lie ahead......

brit1234

I don't think anyone will say sticking between 3-4 x salary isn't sensible. No matter what happens to base rates (which will go up eventually) mortgage rates are now detached. Mortgage rates are far more likely to rise than base rates, so it is sensible to keep borrowing sensible.