28%/36% rule

w00519772

My bank says I can afford my mortgage if my total debt is not 35% of my income. My mortgage will be about £560 PCM. I have no other debts. Therefore:

560/0.35=1600
1600*12=19,200

Therefore I can afford my 115K mortgage on a salary of 19,200? This doesn't sound right to me.

On the 28% side:

560/0.28=2000
2000*12=24,000

This sounds more realistic. Am I doing these calculations correctly. I assume they mean Gross salary as that is what it says. However, they could mean NET salary.

I realise that interest rates could increase. However, I am trying to calculate affordability over the five year fixed period.

My salary is around: 36K

da_rule

Generally they refer to gross salary. And yes your calculations are right, although the outcome does seem odd.

To me this does sound a bit generic, there are lots of other factors, such as monthly outgoings (bills, car etc) that need to be considered, as well as the size of the deposit/value of the property and the term of the mortgage (not just 5 years, but 30 years etc).

tigsly

when banks work out total debt - they ask for your monthly outgoings - so - bills, council tax, mine asked about phone contracts, car loans.. car insurance.. food shopping.. ANY outgoings - and those were counted as debt (although I did ponder council tax - as they were basing there calculation on my current home- and my next home will be a higher band)...

They then asked for the last 3 months of my current account statements - and my last 3 wage slips - to check - my outgoings were matching what i'd said.. (I guess they didn't as my AIP was higher than the value they offered after they had seen my statements... )

ACG

Put in an interest rate of 5% and 6% is it still affordable?
What happens at the end of the 5 years when rates will be higher?

Their job is to ensure you can afford it for the full term of the mortgage as best they can. A lot of changes are coming in next month on affordability checks, most lenders have implemented these changes already.

Question it by all means but at the end of the day, its their money they could tell you that you cant afford to borrow a fiver off them if they wanted to, its up to them to decide the affordability model and down to you to fit it. If you dont then you need to look for a different lender.

dimbo61

Most lender look at 4X income and maybe 5X Income if you have a Good Deposit.
using % is not always good IE
Income £10,000 a year and mortgage say 35% so £3,500 which leaves £6,500 to pay for everything else.
Income £100,000 a year and mortgage say 35% so £35,000 which leaves
£65,000 to pay for everything else.
Now both are the same Percent of Income but could you manage on £65,000 to pay all the bills or struggle on £6,500 ?