Mortgage repayments to take home pay ratio.....

.....thinking of buying a house - worked out that my mortgage payments will be about 40% of my current take home pay. I think this is a lot - however, I don't know if this is normal. Somebody I spoke to at work reckons all of his take home pay goes on paying the mortgage and he and his wife live of her earnings to pay for everything else (food, bills, holidays etc.). That to me sounds a terrible situation to be in, but each to their own.
What ratio do other people pay?
I suppose over time, the ratio will fall, assuming you don't extend your mortgage and your salary goes up by at least the amount of inflation.
Reply to
Gus Ulton

Are you sure you'd get a mortgage for that amount? Sounds like it'd be over 4x salary.
It's not unusual - some unscrupulous advisors/estate agents will suggest you lie about your salary to get a bigger mortgage.
Depends how much his wife earns...
The most I paid was about 20% but that was when interest rates were 15%!
The trouble is that inflation is low so it'll take a long time to reduce by much.
Those with vested interests in high house price inflation keep going on about affordability (ie earnings/mortgage ratio) being greater than many periods in the past, but what they fail to mention is that higher inflation of the past quickly reduced mortgage payments in real terms. My parents bought a large house in the early 70's and were paying a very large percentage of their income in mortgage payments at first, but within 5 years their mortgage was easily affordable and within 10 years insignificant. So it's worth the sacrifice for a few tough years. Now it'll be a few tough decades if you start on a high percentage...
Reply to
Andy Pandy
More like 3.42%
That's one other thing why nobody trusts estate agents
Seems to be the norm though, huh?
Reply to
Gus Ulton

If that was interest-only (and it doesn't matter much if it wasn't, since at high interest rates the repayment payments are only very slightly more than the interest-only ones would be), then if 15% of loan was 20% of net pay, and if net pay was some 2/3 of gross pay, you must have had a very small loan in relation to your gross pay. Some 0.88x in fact. Those people who, back then, may have had 2x or 3x loans could easily have been plowing 45% or even 70% of take-home pay into their mortgage.
In the mid-nineties, when my interest rate was 6.3%, I paid 24% of take home pay on loan interest minus MIRAS plus endowment premium. That was approximately a 2.3xsalary loan.
Reply to
Ronald Raygun
"Andy Pandy" wrote
percentage...
I'd suggest that if, back in the 70's, people could have got mortgages with increasing repayments (pay less per month initially then more later) then the prices on desirable properties would have been pushed higher than they actually were. People actually *couldn't* offer more to ensure that they got the place they wanted.
The current low inflation environment is really just equivalent to people being able to get "increasing payment mortgages" back in the 70's....
Reply to
Tim
wrote:
Here is the theoretical calculations for interest only on gross earnings, no doubt the CML have actual figures for both IO and repayment mortgages -
Interest at Base Rate + 1% as a Year % of Earnings
1970 26% 1971 20% 1972 32% 1973 63% 1974 53% 1975 45% 1976 52% 1977 26% 1978 45% 1979 66% 1980 54% 1981 51% 1982 32% 1983 30% 1984 33% 1985 38% 1986 40% 1987 34% 1988 54% 1989 63% 1990 58% 1991 43% 1992 28% 1993 22% 1994 23% 1995 26% 1996 25% 1997 30% 1998 29% 1999 26% 2000 30% 2001 23% 2002 25% 2003 27% 2004 37% 2005 36%
Average 37% Median 33%
Source ODPM, NSO
It also explains the prolonged spell of house price inflation we're having.
Daytona
Reply to
Daytona
...
...
I've put forward this argument to explain HPI before elsewhere, and I think it does have some merit. However some of the valid responses I received pointed out that unsecured debt is also at record high levels, which also impacts affordability. Further, affordability is only one factor that impacts sentiment, and sentiment is key to HPI/HPD.
Reply to
Tom Robinson

I assume you mean 3.42x? The mortgage rate must be pretty high then - suggest you shop around for a better deal.
On a salary of 30k (22019 net after tax/NI), and a mortgage of 102600 (3.42 x 30k), the repayments over 25 years at 5% would be 7197, so 32% of take home pay. You shouldn't need to pay more than 5% unless you have a poor credit history.
A bit higher than the norm.
Reply to
Andy Pandy

Not quite, you've not accounted for MIRAS - 15% would have only been 9% after MIRAS and higher rate tax relief. IIRC mortgage interest tax relief was available at your top tax rate at the time of 15% interest rates (but higher rate tax relief was abolished shortly afterwards). So the mortgage (interest only) would have been about 1.5x salary.
Reply to
Andy Pandy

No, because it also meant that after a few years, people could easily afford to move upmarket because their mortgage has become trivial in real terms.
And that would have reduced the affordability of their second/third home, so having a downward pressure on prices which would have probably cancelled the upward pressure from getting "increasing payment mortgages".
Reply to
Andy Pandy

Are those figures for all current mortgages in the year, or all new mortgages? I guess they are just for new mortgages, in which case they are misleading.
It makes a hell of a difference - because the top figure of 66% in 1979 looks very high, but if that's just new mortgages in that year, most people paying mortgages in 1979 would have taken them out earlier, many in the 60's and early 70's, and those people would be paying a trivial percentage of their income in mortgage payments because of high inflation.
So if you took the average of all active mortgages, not just all new mortgages, you may find that in 1979 the average mortgage payer was paying a smaller % than now!
Reply to
Andy Pandy
Yes, sorry 3.42x. I have used a mortgage rate of 6.9%, but I suspect as a 1st time buyer I could probably get a cheaper rate on a fixed or discounted deal for at least one year, maybe upto three/four.
OK - my gross/net salary is a lot higher than that, and I suspect I'm being over cautious on the rate I could obtain. My credit history is good, if not excellent, but I've got a 300 a month car loan to pay off for another 22 months, so I suspect they may mark me down for that. I've got no other debts, other than the credit card which I use to buy everything and then pay off in full every month.
Prudent though, perhaps in these days of uncertainty.
Reply to
Gus Ulton
In message , Tim
Those mortgages didnt arrive till much later.
The change in the mortgage and house price market is due to something else.
The difference between then and now is that back then the B/Socs (who were almost the only mortgage lenders at that time) controlled the market and they were strictly regulated. Their main source of funds was their own deposit base and therefore the supplyside of dosh available to lend was restricted. Mortgages were often only granted if you had saved with the society for a year or so and if the local manager liked you. It was a lenders' market, but it meant stability in house prices.
There had been a credit 'squeeze' under Uncle H.W. but then Mrs T, in her wisdom, decided to deregulate the b/socs. This meant they could obtain more funds from the wholesale market, (thereby increasing their supply of funds), and allowed them to seek capital funding on the stock market. This meant the established clearing banks, who had largely avoided home purchase loans on the basis that a prudent banker doesn't borrow short and lend long, decided they had to compete and started participating in the mortgage market aggressively. .
All this meant that for the first time there was competition in the mortgage market, this being a good thing. What wasnt realised by Mrs M, (but obvious to most others), was that the deregulation allowed a huge wodge of almost limitless extra dosh to become available to mortgage lenders from the wholesale money and capital markets. this increased the supply side to the extent that it exceeded demand and once inflation was controlled we then suffered the current property boom.
So the current problem isnt to do with inflation to the extent you may suggest (but I accept it has some influence), but is really as a result of deregulation of mortgagees.
Reply to
John Boyle
In message , Andy Pandy writes
As I read it, it is just interest at +1% BoE BR, and not related to mortgages at all.
I dont think so.
In 1979 Base Rates varied between 12 & 17% which means the total payment for a 25 year repayment mortgage would be over 2.5 times more per month what they would be now for the same amount borrowed now.
Reply to
John Boyle
"John Boyle" wrote
"... **IF**, back in the 70's, ..."!
"John Boyle" wrote
Umm - I didn't suggest that inflation has caused any problem???!
Reply to
Tim
"Andy Pandy" wrote
But a lot of people live for the "here & now". They prefer to get what they want & can afford now, than thinking about affording something in the future...
"Andy Pandy" wrote
Why do you think that?
The different type of mortgage would allow them to borrow a bigger multiple of salary when buying their second/third home, just as much as with their first home.
Couple to that the fact that the deposit they have available for buying their second/third home (from the equity in the first house) will be bigger than it would have been under the "old-style" mortgage, and they're laughing...
"Andy Pandy" wrote
No - *all* prices would have had just an upward pressure!
Reply to
Tim
"Tom Robinson" wrote
But you should expect *both* secured & unsecured debt to be much higher than previously, because the interest rates are lower on *both*.
In other words, if interest rates are *half* as high as in previous years, then people should be able to afford *twice* as high a mortgage as before *and* twice as much unsecured debt, with the same "affordability" as previously...
Reply to
Tim
In message , Tim writes
"... **IF**, back in the 70's, ..."!
I know. I am merely giving facts not theories. What makes you think I am contradicting you?
You seem to be in an even more tetchy mood than usual today. I am merely saying that I disagree with the last paragraph of you original post.
Reply to
John Boyle
"... **IF**, back in the 70's, ..."!
"John Boyle" wrote
OK. Of course, it doesn't matter when (or even if) that type of mortgage ever existed for my point to be valid.
"John Boyle" wrote
It was just your use of the word "didn't" (being a negative), coupled to your turn of phrase "till much later" (which appeared to be making a comparison with the time-frame in my post)...
"John Boyle" wrote
Tetchy? Moi? Surely not! ...
"John Boyle" wrote
That's what I don't understand... "The current low inflation environment is really just equivalent to people being able to get "increasing payment mortgages" back in the 70's...."
But why don't you think that amounts increasing at, say, 5%pa when inflation is 10%pa, are "equivalent to" level amounts (not increasing) when inflation is 5%pa?...
Suppose 100 buys a hundred loaves of bread at some point in time...
Now, if inflation is 10%pa then 105 a year later will buy around 95 loaves. But if inflation is 5%pa, then 100 a year later will buy around 95 loaves (again).
Isn't "around 95 loaves" pretty much equivalent to "around 95 loaves"?
Reply to
Tim

That's not the point. The point is that after a few years they could easily afford to move upmarket, as their mortgage has shrunk and equity has increased (due to inflation), whether they planned to or not. Therefore many would have, simply because that's what most people in this country seem to do just because they can afford to.
Because if their mortgage has stayed constant while their salary has doubled in line with inflation, then they can move upmarket into a house 50% more valuable at no extra (real terms) cost.
If they had an "increasing payment mortgage" which rose in line with inflation, then they could not move upmarket without increasing their outgoings in real terms.
Yes but as their mortgage will be increasing (say in line with inflation) then what they can afford to buy in the future will be constrained by salary increases *over and above* inflation.
What?? The equity on the first house would be reduced by RPI inflation (assuming the above). If HPI = RPI then their equity wouldn't have increased at all in real terms. They would be in exactly the same position when buying their second house as when they bought their first.
Rubbish!
Reply to
Andy Pandy

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