Why is rental affordability and mortgage affordability so different?

[BuffaloCauliflower]

Genuine question because I know there’s many people more knowledgable than me here, but why can’t the bank take proof of income and rent paid as affordability for a mortgage, why is a big deposit necessary?

We live in one of those silly expensive places and don’t want to leave. Average cost of a standard size 3 bed terrace is about £450,000. We live in one and pay £1280 a month rent at the moment (below market average) and have paid more in the past. In the last 3.5 years we’ve paid about £68000 in rent.

If we paid £1500 a month for the next 25 years we’d pay £450,000 - so why can’t we buy a house at the price and just keep paying what we pay? We could have a £40,000 deposit right now and they still wouldn’t lend us enough to buy this house (household income c.£87000 at the moment) It’ll take us at least 5-6 years to save that deposit, but we can clearly afford mortgage payments.

But according to rental calculators we could rent a property at around £2500 a month on our salary. Why the difference? If we can afford that much on rent (I’d never spend that much!) why can’t we get a mortgage for that much?

Genuinely why is it different?

Zero equity mortgages do exist, afaik

Because you don't own the property.

So if the roof falls in they need to know you can pay to fix it, pay for the upkeep etc whereas in rental you ring the landlord.

The bank want to look after their investment.
They are also risk averse - so if you've had to work hard, shed sweat and tears to save that 20% etc deposit you are so much more likely to work hard/borrow from family/prioritise mortgage to ensure you don't lose that deposit in a recession/job loss etc. than if its for the whole amount of the value of the property.

@TisTheSeasonToBe but when you get a mortgage you don’t own the property really, the bank does, you’re paying them back. Why can’t we get the mortgage and pay it back without the deposit, is it really that different? It just penalises people paying large amounts of rent and less able to save, when the ability to pay back the mortgage borrowed would be no different if going on ability to pay monthly payments. We’ve never missed a rent payment.

I suppose because the banks don’t owe you a favour, and handing out 100% mortgages doesn’t make them the most money.

It's protecting their investment.

Repossessing a property from a mortgagee is long, hard and expensive. If there is no equity in the property, the cost falls on the bank and directly affects their profits. I've worked in asset management for the main banks (repossessions) and the costs involved are in the thousands.

Banks are not there to be nice and help people, but to make a profit. Hence the need of a deposit or some other collateral.

I agree with you @BuffaloCauliflower my house would cost more to rent than the mortgage costs each month

But according to rental calculators we could rent a property at around £2500 a month on our salary.

It normally comes down to risk.

If you fail to pay your rent then it's (reasonably) easy to be kicked out and then the landlord can rent the property out again.

Once you own a home though it's reasonably difficult to sell. From the banks perspective they could stand to lose a lot of money if you fall behind in payments. Pretty much they borrow money (either from customers or from the bank of england and then they lend it to you at a higher rate. If you stop paying then they still have to pay their lenders) Also the legislation around responsible lending has got better over the years so lenders have become more cautious.

I just did a quick search and a £410,000 mortgage over 25 years is likely to be £2100 - £2300 per month. That's £800-900 more a month you'd need to spend compared to your rent.

Banks normally go on 5x gross income for affordability if you're making a joint application. Plus you have to list any fixed outgoings (like childcare etc). So at £89k you're only just at the edge of the affordability for that size of mortgage (and you might not be if you have childcare costs).

For comparison our mortgage is about 1/3 of our total possible affordability (but we're 'up north' so relatively cheaper houses). Either way I'd hate to be on the edge of affordability, too many things could go wrong and cause a lot of stress.

You don't just pay back the 450, you are paying interest on top of that, it would be more like 600k at the end possible more. Your monthly payments would be well over 2k

@Alarae I do get that, and I certainly don’t feel owed anything. But say we got a £380,000 mortgage on 95% (probably the highest we could get having looked before, ignoring that 95% mortgages are off at the moment) how much less risk do they really have for the sake of our £20,000 deposit, considering how much they’re lending?

As others have said, it's partly because you will be responsible for any repairs (and there is always SOMETHING) and partly because the last time banks shelled out mortgages with zero to low deposits there was a bubble and a financial crash.

Just look at the current situation: economists are predicting that our GDP shrinks by a THIRD and thousands of people are losing their jobs and incomes. They won't be able to pay the mortgage, houses will be repossessed, buyers will be few and far between...

It's frustrating, I know. I also used to live in a naice area but could not afford to buy there. Well I could, but I didn't want to purchase a studio apartment. We moved into a much less desirable area and own a 3 bedroom house for the same price. However, it is a terrace, which I regret most now that we're in lockdown and I can hear kids on one side and loud TV and music on the other. This wasn't a problem when people were allowed to go out!

@bigmove2020 ok so say the mortgage payment is £2000, fine. That’s still vastly below the amount we could afford to rent. We could afford payments of £2000 a month, we could apparently rent at £2500 a month - why can we apparently afford one and not the other?

I agree with @TisTheSeasonToBe
The banks are taking a massive risk buying a house for you, you should be able to afford your rent and then some, so you can make improvements and maintain the property. Your landlord maintains your property, you'll be taking on that financial burden.
Plus if you dont pay your mortgage the bank can sell it cheap and quick to get their own money back. If they pay the full value then they have to work to sell it for the same, possibly do repairs if you've damaged it in your time living there so they're risking a loss.

We could pay £2000 mortgage and save the apparently spare £500 for repairs

I think they went through a phase of offering mortages of 100% or even more before the 2008 banking crisis.
I think they got a bit stung when people struggled to keep up with repayments.

They don't want to repossess people which is expensive and looks bad (and not much fun for the people who are having their homes repossesed) as a result banks are more risk adverse now.

Wasn’t the global financial crisis caused by sub prime mortgage lending?

So they’ve pretty conclusively demonstrates that they have to be strict about who they give a mortgage to.

Because house values go down as well as up.

Because banks lose lots of money if they have to repossess and sell on, usually the houses are a state and go for much less than valued.

Because with a rental you keep the deposit and get new tenants - less risk.

Because you usually end up paying back much much more than what you borrowed, so the real cost would be higher.

Because you will have additional costs as a homeowner to factor in, insurance, repairs, upkeep, etc, that you don't have now.

@Nameofchanges I absolutely get being careful who they lend too, what makes less sense is why a history of paying high rents doesn’t indicate at least a bit that we’re reliable people who pay for things.

@Frlrlrubert I do get the ease of getting someone out of a rental and wanting to be careful. But why is rustling up a £20,000 deposit the be all and end of that care? A relative might have just given it to us, we might have won it gambling? Having access to £20,000 doesn’t necessarily indicate you’re sensible with money

how much less risk do they really have for the sake of our £20,000 deposit, considering how much they’re lending?

Because they're lending you money knowing that if you don't pay, they get the house - the cost of selling the house is going to more than 20,000 straight away (court costs, commissions, stamp duty, time, discount, council tax whilst waiting) So without the deposit they're really going to struggle to even get their money back, let alone enough of a return to pay who they borrowed the money off the interest they expected.

That's what the deposit is for. And in a falling market, as is likely now, the deposit has to be higher as those costs go up even more.

Op, you own the house outright if you have a mortgage, it’s not shared with rhe bank.

A mortgage is a loan, to secure that loan, or guarantee the bank will get repaid, you effectively tell them you will sell the house you own if you can’t pay your loan back and pay them out the proceeds.

You need a deposit because the bank wants its loan protected. So if you don’t maintain your property and it falls into disrepair, the value drops. If you then sell it, the odds are the bank still gets its money, because you have not used the full value of the house to guarantee the loan. Any drop in value comes out of what you paid Ie the deposit, the bank always gets their money.

So you buy a house for 450. You pay a fifty grand deposit. The bank loans you 400. If the value drops and you need to sell. The odds are you will sell for more than 400. That’s all the bank wants.

If you make a profit, Ie the property escalates in value it’s your profit. It’s called equity, if you invest in the property it’s your choice. Any profit or spend is yours to make. As you own it.

The bank simply want you to repay your loan as agreed. And all you have done is said I will do so, and If I can’t, I will sell the home I own and you can take what’s owing from the proceeds.

Banks do not wish you to default and have to sell your home to pay your loan back, so they carefully check your affordability, just like any other loan.

You also pay your loan off every month. So if you borrow 400. In a year you likely own 390. And so forth. Every year how much you owe decreases. Because it’s just a loan you’re paying off.

That’s why renting and buying are very different. One is a huge loan. Often over twenty five years. The other is a short term contract of very limited value in comparison ie a few grand.

PP have explained this perfectly well, you just don’t appear to like the answer. The lender has to take a risk vs benefit approach when lending. Plus your liability when renting is only ever going to be the rent pcm for the duration of the term. Vastly different to a mortgage.

Most credit checks require you to earn 3x the rental value, mortgages are 4x.

£500 pcm isn’t really that much. You can spend that (and some) on replacing a fence, minor boiler repairs, white goods....

The whole situation is because we have been building not enough houses for the last 40 years, despite governments of both colours being told repeatedly what they need to do. As a result of this the differences you see in attempting to buy a house, mean that entire generations have had vast swathes of disposable income squandered on artificially inflated house prices. I'm no lefty at all, but this is a result of market failure that has been allowed to develop by multiple governments, and unfortunately, as someone in their early 20s, I'm going to massively struggle to buy a house, and the only way this will be fixed is by massive government involvement.

^^ as interesting as that is student it has no bearing on banks affordability criteria.

OP: Why is this?

EVERYONE: Because A, B, C, D, etc.

OP: But NO!

The affordability rules were introduced by the FCa. It is to prevent over lending. A mortgage is long term commitment and circumstances can change.

Try a mortgage advisor like (fee free) London and Country as they will have a better idea of what might be available.

With the current crisis, some lenders are now expecting a 40% deposit. They are protecting against possible collapse of the housing market.

Right now, are you making a choice to have a nice home at the expense of buying your own home? Could you rent something smaller? Do you need 3 bedrooms?

This would be my thought process. 100% and 115% mortgages won’t be making an appearance any time soon and the smaller the deposit the higher the interest rate due to increased risk to the lender.