Low Income but reasonable deposit & affordability

TartanSaver

I have a low income (£8250) from a permanent part time job. I have £14.5k in savings.

I'm trying to buy a 2 bed flat within the Edinburgh commuter belt. I found one for offers over £47,000. This would mean a 69% LTV mortgage, and the debt would be just under 4x my income. There are quite a few on the market for £50k.

I've never defaulted, have had my principal bank account since 2010, and maintain a number of current accounts for interest purposes. I have 2 credit cards, one with zero balance and one with <£200 (which is in a 0% interest free purchases period.) I was toying with slow stoozing, but now that I've decided to go for a mortgage I'll be paying the card off.

A lot of lenders seem to have some kind of hidden "floor" based on income - I have been unable to find it in writing, but it's pretty clear many of them won't touch me. Some have a minimum property value, which at least I can understand.

For the life of me, I can't understand why I'd be considered a big risk. The mortgage payments would be about £150/pm, buildings insurance about £150/pa. It's almost impossible to rent a room in the region for less than £300/pm, never mind a 2 bedroom flat. Even if interest rates went up dramatically to 12% the mortgage would be under £350/pm. I intend to take a lodger in the spare room, but that would be supplemental income - certainly not a necessity to pay the mortgage.

I wondered if anyone had any suggestions for brokers who might be able to help with this. I know brokers have to make money, but I'm not keen on fees because £500 is a lot more of £32.5k than of £300k!

Senior_Paper_Monitor

I feel it necessary to point out that you are expecting an adviser to work for a max of 0.4% of £32,500 = £130 (more likely to be c £100) which, even ignoring overheads, will put him/her on something near to the minimum wage !!

kingstreet

On that level of income, more of your take-home pay is used up covering subsistence expenses, so less is available to fund a mortgage.

As a result you won't be offered a multiple of say, 4 x your income these days.

As SPM pointed out, there's a level of work required in any mortgage application which means a certain level of income is needed to make the case at least cover its costs and at 0.35% of £32,500, or £114, it won't do that.

audigex

Going direct to lenders (eg banks) may be an option, as they may operate differently to the above.

As mentioned, though, yours is a tricky case because minor costs are a much higher proportion of your income: For anyone else £1k to replace a window is perhaps 3 months of mortgage or 1% of the property value. For you it's nearly 7 months mortgage payments and over 3% of the value.

Similarly you have little ability to absorb other changes: even a moderate price rise for energy and food, for example (often linked) could dramatically hit your finances. You say you're going to live in the commuter belt: could a price increase on transport leave you in serious trouble?

Although I agree with you that you can probably manage it, if you're careful, I'm unfortunately not a lender: and they'll see you as a fairly high risk investment for a fairly low reward.

To be blunt: I don't think you have much realistic chance based on your income. I'd assume your expenses break down to something broadly similar to this:

£687/month income
£150 mortgage
£80 electricity?
£88 water & council tax (Band A in Edinburgh) - or perhaps £66 (or somewhere betweenI don't know what the 25% discount applies to)
£15 Home insurance
£14 TV license

That's £325 of expenses at about the best case scenario I can think of. Rising to more like £450 with a moderate rate rise (not all the way to the 12% you suggested)

That leaves you with somewhere around £240-360 for food&drink, household consumables, clothing, repairs, phone, mobile, transport, savings, maintenance, and your social life etc. I really don't see how you're going to convince a lender that this is affordable for you: even living frugally, that won't leave you with any ability to build up savings for maintenance etc.

If you're determined to go ahead with it, you may find someone willing to lend to you: but be prepared to do the majority of the leg work yourself, as you're not an attractive client for a broker.

amnblog

You have three options here.


1. Continue to bag your head against the wall to try to find a suitable lender


2. Engage a mortgage broker that will not charge you a fee (although if you find one prepared to take on the advice and risk for £120 in revenue I would question their sanity.


3. Pay a modest fee to a broker and get the job done properly.

TartanSaver

Re broker costs - fair play. I had wondered what proportion of the value a broker was likely to see, and I can understand why I wouldn't be worthwhile to brokers on that basis. I'll have to pay up, it seems. What would be a "modest fee"? I looked at Charcol and felt £500 was pretty hefty...

Re affordability - I'm a full time student, so no Council Tax. When I cease to be a student (2 years away yet) I'd be entitled to some CT reduction if my employment circumstances haven't changed. I don't have a TV. Your estimate of utility costs sounds about right, and I'd need about £20 for internet. Transport would be about £100/mo (driving.) If fuel costs went up dramatically, then that would hurt, it's true, but I'll make it work.

With regard to buffers: I have managed to save for a deposit because I've been getting a loan for living costs but not spending a penny of it for the last 18 months. This has been possible because I've managed to live entirely within my low income, and I can assure you it has not always been a joyous experience spending <£20/wk on food while watching my bank balance grow with loan money. I know I can live like this because I already do.

I'll still be getting a loan for the next two years, so I should very quickly be able to build up a healthy safety net. However, lenders don't take student loans into account which is both a blessing (in terms of my evaluating my debt obligations) and a curse (in terms of affordability.) I understand why this is the case, but it means that, in reality, this is much more affordable than it appears on paper.

Anyway, thanks for all the input. The general consensus seems to be:
1) It's a bit tight because a lot of lenders will struggle to believe how little I manage to survive on.
2) I should accept the need to put my hand in my pocket, brokers need to eat too.

audigex

With regards to 1) it's not that lenders will struggle to believe you can survive on £680/month (you can prove you can), it's that they're legally bound to test your affordability under certain criteria, which essentially means estimating your worst case scenario. In essence, they don't believe you could handle a moderate cost increase in a few key areas.

Your worst case scenario could be a 50% rise in fuel bills (so +£100 on heating and your car. This also pushes food prices up, so let's guess at 20% which would probably be £20-40. Let's assume bad timing as the economy picks up sharply at the same time as those fuel rises and add in £100-150 if interest rates rose moderately and you've just added somewhere between £220 and £300 to your costs.

For someone on an average income that £200-300 increase represents probably around 1-8th to 1/6th of their income, and is likely mostly discretionary spending. They'd have to tighten their belts but would likely be okay. For you, that would be almost a 50% increase on your monthly costs, and you just don't have anywhere you can make up the difference from. You know yourself that you have loans which go into savings as a buffer, but they don't count those.

Honestly, I'd say just keep saving your loan and any income you can, build up your deposit and buy in 2 years when you're employed. Students (even in your scenario which appears to be a fairly comfortable case in most respects) are generally not able to afford to buy houses.