You work backwards from the risk free return you can get from, say, government stock (gilts). I take 'long term' as more than 1 house market cycle, say 15+ years this enables you to use the long term house price growth of 5.7%pa in real terms under a low inflation environment.
If mortgage rates are 6% the risk free rate is probably around 5%. Because property investing carries more risk, you require a better return, say double the risk free rate minus inflation : 5% - 2% = 3% x
2 = 6% real, assuming inflation is kept within the current limits.
If you look at things in terms of total return (income + capital growth) you require 6% - 5.7% = 0.3% in terms of income assuming you get 5.7% from capital growth. This gives an annual rent of approx £10,000, £909 monthly.
If you can cover the full amount of the mortgage as a tennent why aren't you just taking the mortgage out yourself? 100% mortgages are not hard to find, in fact you can sometimes get a 100% + mortgage.
It seems to me that your sister and brother in law will get 2/3 or the property while you pay for everything - that doesn't make sense.
Don't be silly. There's the little matter of the income multiples limit. Hence the idea of going buy-to-let, where income multiples tend generally not to matter, provided there is adequate cover from rental income. Now, if she could scrape together the 20%-or-so minimum deposit required for BTL all by herself, then this would indeed be a possibility to pursue. But chances are she can't.
It does if they put up equal shares of the deposit.
Also, she could get charged below-market rent, if the rent is calculated to break even and make no profit for them, just to cover expenses.
Essentially this is a straightforward 3-way partnership to run a rental business, but with the slightly unusual arrangement that one of them then also chooses to be the tenant. But that need not be a permanent arrangement, and she may wish to move elsewhere in due course and get an unconnected tenant in.
Presumably, while the OP could easily cover the mortgage payments from salary, the actual "salary multipliers" used by the lenders are not high enough for them to accept the mortgage?
Eg when interest rates were (say) 12%, someone could perhaps both afford & get a mortgage loan of 3x salary.
Now that interest rates are less than half this, people could probably easily afford a mortgage loan of 5x salary - but will only be allowed to take one for upto 3x or 4x ...
Income multiples are often the limiting factor, which is why I believe they should be scrapped. See the price to earnings ratio and affordability graphs on the real property prices and related stats. link -
As others have suggested, it's because I wouldn't be able to get a mortgage for the necessary amount, based on my income. In fact, I don't know how anyone manages to get onto the property ladder if they are on their own these days, unless they're earning megabucks.
I take your point - it is slightly cheaper to rent here at the moment. My worry is, if I rent, I won't be able to save for a deposit on a place of my own. This doesn't worry me in the short term, and I can see the advantages of renting. But in the long term, and given that I've already reached the ripe old age of 30, I am worried about what happens if I am never in a position to buy my own property - how do you pay rent when your income suddenly halves when you hit retirement?
Another motivation for buying, of course, is to avoid the uphievals associated with landlords wanting their houses back and giving notice to end tenancies.
That doesn't entirely make sense. If it it cheaper to rent than to buy, yet you reckon you could afford to buy, but for the lenders' income rules, surely it follows that you must have spare income to save into a deposit fund. Also, if you continue to live with your parents for the time being, you should be able to put most of your income into savings, no? You're not paying much, if any, rent to your parents, are you?
By heck! If you expect to retire at 40, then yes, you should worry, but there's plenty of time and, don't forget, there's a share in the parental home to inherit.
Fear not, sweetie. Mr Right will be along shortly to buy a house for you. Or perhaps the trouble is that living with your parents stifles your opportunity to meet him. :-)
Yes, but not a huge amount. At current prices, I would need to save a hefty sum for a deposit to be able to get a mortgage, and obviously if I'm shelling out on rent, it's going to take me much longer to do that.
Some, but nothing like market rent. Yes, that's what I've been doing, but the more I save, the higher house prices go, so it seems it's never going to be enough, unless there is a slowdown. I've been waiting and waiting for that to happen, but how long do you keep hoping?! If I just decide to rent, I feel I would be giving up hope completely, as my ability to save would be reduced.
It's difficult not to, without the experience of having lived through the boom & bust of previous housing market cycles - this gives you a more sanguine view of things. It's happened before and it will happen again.
"The average age of a first-time buyer is 34 and continues to rise."
"People now take an average of three years and nine months to save a
5% deposit, financial group National Savings and Investments found."
I hope so. I keep telling myself that current price levels can't possibly be sustainable, and yet I'm seeing expensive properties in new developments around here still going like hot cakes.
Thanks for the links, interesting reading. When I compare myself to my peers, I feel like I'm the only one in this position, but having said that, most of my acquaintances live in two income households, which obviously makes things a whole lot easier!
Well, who knows, perhaps this idea of your sister's isn't so bad. If between you you can raise a BTL deposit, then if prices do carry on rising, you'll at least be amassing a 1/3-ish share of the equity to help you on your way, and also you might still be paying below market (expenses-only) rent, and if you get a lodger to pay a share even of that, you're laughing. But with a minimal deposit, do beware the risk of ending up in negative equity. But hey, you'll only have a 1/3-ish share of the negative equity in question, won't you? That'll be a severe test of the strength of you family ties.
Sigh. If only I were 10 years younger.
Quiet there at the back! Some people have no tact. "Try 20", indeed.
Reasonable answer, and I wouldn't either.. however like my other post in this thread with an average wage of £30k and a one bed flat at £160k+ someones buying, and I suspect its not all FTBers
Sorry meant base rate..
I was debating the figure when i posted.. in the end I guessed based on I think the average home owner probably replaces most furniture/redectorates every 8 years.. tenants aren't so careful, so I divided the figure by two.
That's an option but I'd assume a one bed flat would be easiler to rent if furnished.. after all it would appeal more to the young individual. Similarly (in my experience) an unfurnished flat rents for less than a furnished, and not necessarily in the landlords interest.
Thats the sort of ball park figure I guessed at... thanks, one of the reasons for the orginal post was to check my figures.
Interesting thought... I wouldn't pay £1100 rent!
Why leads to a question, are there 2 types of landlords;
1) Those are profesional/experienced and have a number of properties (ie say 10+). Obviously renting each at a loss could/would be a huge drain on other income, so they generally use their experience to buy the right and/or cheap and make sure the (collective) rent covers all the costs.
2) A less experienced landlord which has one or two properties. They have seen house prices go up and what to make some pension/other provision. Ideally they want to cover the costs by the rent, however could take a loss, and pay part of the costs from other income (ie seeing it as a savings plan.. ie the hopeful end result is they have a paid for property.. where they only paid 20% (or whatever) of the total cost)
Which type would be more affected by a rise in interest rates / drop in house prices?
Maybe it has different rules (SW London).. I don't think so (or maybe I don't understand them.).
OK I'll let you into a secret.. the price I quoted (165k) was for the flat below me 2 years ago.. its just sold for £185
The scary thing.. to rent such a flat 2 years ago would be £750/month.. now you could rent the same flat for £750/month (or maybe a bit less if your lucky)
I suspect the profesional/experienced landlords aren't buying around here because they couldn't cover the costs (for £750 rent/month to cover the costs/mortgage at 7%.. the max property price would be £140k with 1/3 deposit)...
It's not (the sensible) FTB's who would need a 5x mortgage..
If your family are prepared to pay a percentage of the deposit, whilst you get the motgage in your name you woul need to consider their share. It would not be 2/3rds.
Perhaps the three of you should buy tp let and instead of you living there you actually let. benfits would be that you could all share costs and you could rent for more than the mortgage payment...
Might these be the places most likely to lose value in the event of a crash?
Anyway round here the smallest studio flat costs ~120k. That means that even at 4x, you need 30k earnings unless you have a large deposit. This is above average earnings. Most first time buyers earn well below average earnings.
I don;t think so the buy to let property's are the most likely and I would say these are usual 2 bedrooms. In any case if the OP want to buy a property to live in a pending crash is of no concern to them. Also she did clearly say that she was fed up with waiting.
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