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

Eh? I'm confused - what does (eg) the 36% figure for 2005 relate to then?

I assumed it was [average new mortgage amount * interest at BOE+1%] / [average earnings]

But those who borrowed in 60's and still had that mortgage in 1979 would have probably borrowed at least 2.5 times less than someone taking out a new mortgage in

1979.

IR on unsecured debt is lower than previously, but as the rates are generally more points above the base rate, this makes less of a difference than with mortgages. The real story is that it has never been easier to get a personal loan or a credit card. The ease of obtaining credit has a bigger impact on how much lending is taking place than just the low interest rates.

In message , Andy Pandy writes

Sorry, perhaps we are talking at cross purposes. I thought you were also taking into account the discounts new borrowers receive and I was pointing out that the interest rate quoted, i.e. BR +1, was an absolute rate which is not really related to mortgage interest rates.

Lenders' Income multiples were lower then but still relatively static over that period. There is no evidence to show that borrowers limit their loan according to affordability, it is almost always limited by what the lender will lend them.

"John Boyle" wrote

Eh? When price inflation of the loaves is 10%pa, I'm suggesting increasing payments at 5%pa.

When price inflation of the loaves is 5%pa, I'm suggesting increasing payments at 0%pa.

What do you mean by "applying the same rate to the cash and the loaves", and what is wrong with doing that?

"Andy Pandy" wrote...

But they could *afford* to move upmarket even more, if they had access to the different style of mortgage. [See below.]

"Andy Pandy" wrote...

In that case they would in my scenario too!

"Andy Pandy" wrote...

But your "real terms cost" constantly reduces over time, simply due to the type of mortgage used. With the type of mortgage I've suggested, that "real terms cost" can remain much the same, meaning that the house purchaser can afford to pay more for a house that would otherwise be out of their reach.

And if they *can* now "afford" to get the house that they want, many pe> If they had an "increasing payment mortgage" which

No, the outgoings would remain *constant* in real terms - that's the whole point of the type of mortgage I've been describing!

"Andy Pandy" wrote...

No, because the extra payments to the mortgage (by keeping the outgoings at, say, 40% of earnings - rather than allowing them to reduce over time) would act like a "savings a/c" which would increase the equity in the house (see "Part (2)" below).

"Andy Pandy" wrote...

... IGNORING any payments to the mortgage.

If > They would be in exactly the same position when buying

NO! Equity comes from two sources: (1) Increased house value less 'original mortgage increased by interest' (as above); and (2) All payments made on the mortgage. [Imagine that no payments at all were made on the mortgage - not even interest - for part (1).]

Part (1) will be much the same under any circumstances (as shown above), irregardless of type of mortgage used, assuming HPI = RPI (as you did) and further that HPI = RPI = IR (interest rate).

But Part (2) will be higher under my scenario, simply because the mortgage repayments are kept at (say) 40% of earnings, rather than allowing the percentage to fall over time...

"Andy Pandy" wrote...

See above.

In message , Gus Ulton writes

The estate agent shouldn't be doing that but the mortgage advisor, and if they have any sense they would in that situation go to a lender where you don't say any income and just say 'I can afford these repayments,' although, understandable the rate goes up a bit to cover the risk.

Here's the figures from the CML -

Interest payments as % of income Year median

1974 15.5 1975 14.1 1976 13.6 1977 12.8 1978 . 1979 15.1 1980 18.0 1981 17.5 1982 16.7 1983 14.7 1984 16.7 1985 19.1 1986 17.7 1987 17.9 1988 18.7 1989 23.7 1990 26.5 1991 21.6 1992 17.7 1993 13.4 1994 12.1 1995 12.3 1996 10.9 1997 13.9 1998 14.7 1999 12.7 2000 14.3 2001 12.9 2002 11.6 2003 11.3 2004 13.9 2005 15.3

The income used appears to be the median of borrowers which at £36,950 for 2005 is 62% higher than the median income of all people working full time of £22,817 [1].

The loan used appears to be the value of all loans divided by the number of loans.

Daytona

[1]

No...

No...

Yes, the bog standard IO/repayment type in a high inflation environment.

Yes, but their ability to move upmarket will be vastly reduced.

Not if they move upmarket!

Eh?

Yes. But extra payments can be made to the mortgage in both your type and the bog standard type. I've assumed no extra payments to the mortgage in both cases.

OK, I think I've misunderstood you.

What I though you were proposing was a type of mortgage where the mortgage payment increases in line with inflation, and so does the mortgage debt.

For instance if RPI was 10% and the interest rate was 15%, the interest demanded would be approx 5% and the mortgage debt would increase with RPI. Thus the initial affordability would be much greater, but the ability to move upmarket would depend on above RPI salary increases.

If you meant a mortgage which started initially the same as a bog standard one, but where payments increased in line with earnings, then the initial affordability is the same! And the subsequent affordability would be similar to someone who saved the equivalent of the extra payments you're making by increasing payments with RPI. So it wouldn't make any difference.

No, my concern was that the figures seem to reflect only new mortgages, not all current mortgages.

I think you've missed the point. If I took out a mortgage in 1969 and you took one out in 1979, then I would have borrowed far less than you simply due to inflation. But in 1979 we both had active mortgages - but mine would have been a much lower % of salary than yours. So in 1979, there would be many people paying very low % salary in mortgages simply due to inflation.

In message , Andy Pandy writes

Yes, I think I have. That will teach me to barge into such a well established thread!

I take, and concur with, your point.

"Andy Pandy" wrote

Yes! Even for their 2nd/3rd etc house, if the "new style" mortgage allows a salary multiple of (say) 10x instead of

3x, and the equity in the previous house is similar (or bigger when they'd had the "new style" mortgage before), then they'd *still* have more to spend on that 2nd/3rd/4th house than they would using "old style" mortgages!

Instead of only upto "3xS + X" to pay for the new house, they could pay upto "10xS + Y".

['S' is current salary, 'X' is equity if they'd had an "old-style" mortgage, 'Y' is equity if they'd had a "new-style" mortgage : Y > X.]

"Andy Pandy" wrote

Again, why do you think that? They could spend much more on a 2nd/3rd etc house than they would have been able to without the "new-style" mortgage. [See above.]

No, it's constrained by (something like) "10xS + Y" instead of "3xS+X" (see above).

Anything you pay to any mortgage acts like a savings a/c, at the mortgage interest rate. This is true just as much for payments usually considered to be "interest" as for payments usually considered to be "repayment of capital" :

Take a 100K interest-only mortgage at 6%pa to buy a 100K house which rises in value at 6%pa. Initially: equity = 0K. After one year, you've paid 6K "interest" on the mortgage, the loan amount is still 100K but the house is now worth 106K : equity = 6K.

Effectively, the 6K "interest" payments to the mortgage have created 6K extra equity, so it was just like a "savings a/c"!

"Andy Pandy" wrote

... in which case, in later years they'd be paying *more* into the "new-style" type of mortgage than the "old-style", simply because the payments are designed to increase rather than stay level - and hence increasing their equity more. [As above.]

"Andy Pandy" wrote

"Andy Pandy" wrote

I meant that the payments could increase at various rates, but if they were chosen to increase at around salary escalation, then the payments would be a constant percentage of earnings.

"Andy Pandy" wrote

The debt would increase with interest, and reduce with payments made - just like any mortgage loan.

"Andy Pandy" wrote

That would only be true if people pushed the price of a smaller house up to the full "10 x salary" that they could now borrow. I'd suggest that it wouldn't go that far, and if that smaller house cost them (say) 5-6x salary, then they'd be able to move upmarket by borrowing upto the extra 4-5x salary for the difference.

"Andy Pandy" wrote

The (monthly) payments would start initially the same, but the multiple of salary borrowed would be higher - so the purchaser could afford to pay a higher purchase price.

"Andy Pandy" wrote

If they both "saved" the same, then 'X' would equal 'Y' in "3xS + X" and "10xS + Y". I still think that 10xS beats 3xS !!

What?? A 10x salary mortgage with, say, salary increases at 10% pa and interest rates at 15%, and say take home pay was 2/3 of gross pay - would mean that even if you spent *all* your take home pay on your mortgage you wouldn't have paid it off after

25 years! Work it out if you don't believe me.

"Andy Pandy" wrote

[1] Try it again with more sensible figures, like 10% salary increases & 12% interest, or 13% salary increases & 15% interest. [It *will* be paid off!] [2] Previously, you said to assume RPI = HPI and we already know that roughly HPI = IR; So shouldn't you assume they're both the same? [3] Why do you think that you need to "pay it off" within 25 years anyway? [4] I did only say: " *IF* multiple of 10x " !!

Even with those figures you'd need to spend over 75% of take home pay on the mortgage to pay it off in 25 years. Some people have lives and want to spend their money on other things than the roof over their head!

To take out a mortgage on the basis that your salary will increase in line with the interest rate would be daft - whatever the long term average is.

You don't *need* to. You don't *need* to ever go on holiday. You don't *need* to ever go out and enjoy yourself. You could spend every evening and weekend sat in admiring the house you're spending most of your income on.

And then based the rest of your post on that limit.

"Andy Pandy" wrote

Alternatively, they could pay around just 30% of take home pay (20% of gross pay) on the mortgage, and keep the equity about the same in real terms.

[If house values and salaries rise at 10%pa and interest is 12%pa, then all of house value, mortgage debt & equity would rise at about 10%pa.]

"Andy Pandy" wrote

That's their choice, so they can do that instead if they wish - I'm only talking about *choices* here!

"Andy Pandy" wrote

Why?

"Andy Pandy" wrote

Or alternatively, you could pay just 20% of gross salary on a 10x mortgage (as above), and go on many holidays, continually go out enjoying yourself, doing what you want to do every evening & weekend, and when you *do* go home, admiring the splendid pad you could afford with 10 x salary!

Thing is lenders tend to have this annoying habit of wanting their money back.....

Which means you'd have to carry on paying the mortgage in retirement, so you'd better save a lot more into your pension.

You have the choice of living in a cardboard box too. You have the choice of sticking pins in your eyes. So what? Just because lenders may allow something, like a

10x mortgage, doesn't mean anyone would be daft enough to take them up on it.

Because the historical long term average may not apply to the next 25-50 years. Have a look at what happened to share prices in the 50 years 1900-1950, and the 50 years

1950-2000. They are *vastly* different.

Except that if everyone were daft enough to do that, and lenders were daft enough to allow it, the "splendid pad" you could afford would be same as the pad you'd have otherwise only have had to pay 3x salary for. And you'd be paying the mortgage, increasing in line with inflation, till you die.

"Andy Pandy" wrote

You pay them back when you sell the house!

"Andy Pandy" wrote

Which you can afford to do, because the mortgage doesn't cost as much!

"Andy Pandy" wrote

I'm sure many people *would* take them up on it...

[I'd disagree that they'd need to be "daft" to do so - it's just a personal choice. *You* might not take that choice; others may have a different outlook and jump at the chance!]

"Andy Pandy" wrote

That's just the risk you take. You've heard of "risk & reward"?

If increases aren't happening the way you'd like, then you can sell the house and get the cheaper one that you'd have gone for otherwise, anyway!

"Andy Pandy" wrote

Do you really think that people would bid-up prices that far?

[Consider that the current low-inflation, low-interest environment is similar, and people could afford an interest-only mortgage of 10x salary now...]

"Andy Pandy" wrote

What's wrong with paying for what you're enjoying?

So the lender needs to gamble that the house price will rise faster than salary increases.

What??? Paying 30% of take home pay, increasing with inflation, until you die, costs less than paying a 3x salary repayment mortgage for 25 years which doesn't increase with inflation, in a high inflation environment? And also having to save for a

96% of salary pension, rather than the usual 66% of salary pension, so you can carry on affording to pay it in retirement?

Well, you may be right, knowing how incredibly stupid the average British person is when it comes to house buying.

Anyone with any sense builds a margin of error into what the crystal ball tells them. And if they don't, their lender sure will.

After paying off the negative equity?

Lenders aren't that stupid even if many people are.

Funnily enough - I tend to enjoy myself much more when I'm *not* in my house. In general.

Lets suppose inflation is 20% across the board, and interest rates are also

20%.

You buy a house for £100,000 with a 100% mortgage, and pay £20,000 in interest on the loan

After a year, you have a house worth £120,000, on which you are still paying £20,000 interest. You could afford to borrow £120,000 and pay the same interest in real terms, so this means you can now have a house costing £140,000.

The reason this happens is that you can take advantage of the full inflation increase on the house without actually paying any of your own money to buy it.