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?

Because they're lending you money knowing that if you don't pay, they get the house

This is totally and utterly incorrect. They do not get the house.

If you default they can force the sale. They only take what is outstanding on the loan. Anything else is yours.

So if you owe 400 in total and the house sells for 450. You get the fifty and they take the 400. They do not take your deposit. They simply take their money back, inc any interest owning on the current loan term, based on terms, Ie one year deal etc.

I think banks would be crazy to lend 100% right now. Lots of people will be getting pay cuts, made redundant, fall into negative equity... and some areas will see bigger falls than others anyway. Eg areas near gatwick airport

Having access to £20,000 doesn’t necessarily indicate you’re sensible with money

Op, has it been explained ? It’s nothing to do with you being sensible with money, the 20 k simoly means if a sale is forced as you defaulted then they are more guaranteed to get their full money back. The first 20 k loss is yours, as is all profit above what they loaned.

It is passing the risk to you, the deposit protects them if the property drops in value and they need to force a sale to get their money back as you can’t pay.

Because when you rent they is all you pay. (Although it certainly is a lot and often more than mortgages)

When you take out a mortgage you also need to pay buildings insurance

You need to folk out when things go wrong (and they do- believe me. Just this weekend I’ve had my tenant call up about a leak. Last year it was my own home. There’s always something)

And the mortgage company’s need to be sure if mortgages rates suddenly went up that you could repay the higher rates.

Because interest rates go up and down as do property prices.

The need for a deposit protects the bank against a fall in value of the property.

The income multiplier takes into account what mortgage repayments would be if interest rates were to rise to more normal levels (say 7% or so), and calculates your likelihood of being able to continue to keep up mortgage repayments if that happened.

Basically when renting a house, the person renting it to you needs to ensure that you can reasonably pay your rent for the next 6 -12 months, and its relatively easy to boot you out after that. It's not a long term commitment on either side.

When buying a house the bank needs to do a risk assessment on the next 25-30 years, which is likely to include, at times, lower house values and higher interest rates. The bank needs to ensure enough of a margin to ensure that they don't lose money in the case of higher interest rates and lower property values.

Rent is higher than a comparable mortgage on the property for two key reasons

The rent includes all repairs and maintenance, so it is bumped up to include this. The repairs and maintenance are not free. You pay for them in the rent. As well as the service the landlord provides in doing that.

There is also an element of profit in there too, because the private landlord is not renting his property as a hobby or a charitable act. It is a business, designed to make money

The deposit, is so that if you damage it, the cost to fix it, is yours not the landlords.

And as said, mortgage deposits are so if you can’t pay back your loan and the property is to be sold, the bank has mitigated the risk the property at the point Of sale is not worth less than they loaned you, so they get their full money back.

The market can drop, but more often what causes a decline in value, is people buy it and do not maintain their properties, resulting in it being worth less than it was when it was bought. So any sale at a reduced value and the bank still gets it full loan back. Any profit over the loan value is yours to keep. The bank, as said, just wants their loan back and any interest outstanding on the current terms as per the agreement.

@TriangleBingoBongo it’s really not a case of disliking the answers, I get the answers and I don’t disagree, I just feel like the concepts need digging into a bit more

@TriangleBingoBongo
Oh of course it is simply the context for the current situation, and it is a rather poor indication when there is something of a demand for 100% mortgages. The help to buy scheme simply increased demand for new houses and thus the average price increased.

OP I have a solution for you although you might not like it. We have always spent as little as possible on rent, lived in goos areas but in very small properties. Studios and a one-bedroom flat. Including when we had children. It was crowded but we could fit all the beds in, had all the essential furniture like a dining table, space for toys, a TV, etc. When our youngest was 2 we bought a three-bed well-detached house in a sought-after area. The incomes and affordability were always fine - it was, like you say, a matter of deposit which we had to save for.

I’d agree with mandala. I have rented out a couple of properties and also rented.

And one thing people always do is they rent a house way more than they could afford to buy or need. It is money down the drain.

Much better to go into a small rental for a couple of years, suffer it and save the money you would have spent on rent and use it as a deposit to buy.

So instead Of spending 1200 a month on rent, spend 700 and then save that extra five hundred for a deposit.

That’s six grand a year you save. You end up buying much quicker, than throwing your money away on rent in a never ending cycle.

Thank God for the time when banks did 100% lending. Like OP we could afford rent but could not save the deposit. Banks can still calculate the risk of lending based on our profile, credit history, work history and compensate for the extra risk by charging a higher interest rate.

Tbh I think affordability is often too lax now, interest rates are lower than they’ve ever been, which means technically people can afford to borrow five times their salaries, however, if interest rates go up a lot of people will find their mortgages unaffordable as they’re stretching themselves to the limit already on 35 year mortgages.

Tbh I think affordability is often too lax now, interest rates are lower than they’ve ever been, which means technically people can afford to borrow five times their salaries

Affordability is more strenuous now than it’s ever been. The mortgage rate is stress tested against much higher interest rates, hence why people can’t borrow as much.

The rent includes all repairs and maintenance, so it is bumped up to include this. The repairs and maintenance are not free. You pay for them in the rent. As well as the service the landlord provides in doing that.

Agreed. I don't make any profit on the flat I rent out but the costs to do so are included in the rental price.

Because it’s not as if you are buying the house from the bank. The money for the house has gone to the vendor you bought it from. If all that money comes from the bank and then you don’t fancy paying your mortgage and (in effect) hand the keys back and walk away, all the loss is the bank’s - and that’s after the legal costs of getting you out. They aren’t there to do you a favour and take all the risk; that’s Essentially what caused the financial crisis in 2008.

You’re also ignoring the fact that mortgage repayment calculations are also figured out based on whether you could afford it if interest rates skyrocketed. When I got my mortgage offer it stipulated what the highest interest rate in the last 20 years or so would mean I was paying per month, it was almost triple what I currently pay but the bank needed to know that I could afford it if rates went up astronomically.
I get it though, it frustrated me when I used to live in London that I could afford to pay someone else’s mortgage but wasn’t allowed my own. It’s why I think we need more rent to buy schemes. They’re practically non-existent, but also only apply to new builds, whereas I think there needs to be a scheme for this sort of thing through a bank (e.g. you pay rent for x years, a percentage of which counts as a deposit and after that you are granted a mortgage, or your tenancy ends.

For clarification, a 15% interest rate (the highest in uk history) would mean £5,059 a month repayment on a £395000 mortgage. That’s more than double what you say you can afford according to rental calculations.

Because you don't want to become a mortgage prisoner among other reasons.

I sympathise OP, I was in a similar situation. Shared a flat with someone, rent was £900, girl upstairs had a mortgage, just under £700 (we were friendly and able to chat about those sorts of things). Shared for two years then flatmate wanted to live on their own, offered me the option of staying and they would find somewhere else, but I couldn’t afford it alone. I could have afforded a payment of £700 though. The really galling thing? She worked p/t in a supermarket and I worked full time in a fairly well-paid role. TBF, I do think her parents gave her the deposit and were possibly guarantors on the mortgage. But I could never work out, how I could ‘afford’ £900 (agents said my wage alone would have met the criteria alone) but not £700.

I do remember reading many years ago in one of the Sunday papers that a minister had suggested being able to take rent payments into account when applying for a mortgage; particularly in areas that were more expensive, especially if rent had been paid for a number of years reliably. Obviously nothing came of it, but it would have been a lifeline for a lot of people. I am thankfully a homeowner now, not necessarily in an area I would choose, which brings its own issues...but that’s another story...

@Greensidepark that’s great that you are a success story but many, many were not. On a macro level it was a disaster. I’m sure you remember the 2008 financial crisis?

It’s actually down to stress testing of interest rate increases

So you might be able to afford a £1500 month mortgage right now at 1.5% but when that goes up to 3% you’re unlikely to afford it and could default

That’s why

What I find more bizarre is that landlords don't require more security from tenants. A bad tenant, who damages the place and doesn't pay rent, and won't leave without a court eviction, can easily cost £10,000+. And they may well have no significant assets, and become hard to chase once they've moved on. If anything landlords should be tightening up the security they require rather than banks relaxing theirs.

There are alternatives;

Live in an area where properties are cheap
Save up
Buy outright, no mortgage

Work where accommodation is included as part of the wage

I agree with previous poster, live somewhere very small

Live on a houseboat or campervan

Live in some sort of communal community

Self build

In the past there have been 110 percent mortgages before a crash

I have the opposite problem, I have a deposit but my salary is too low to buy. I could put 40,000 down as a deposit at the moment but my salary is in the teens so I couldn’t get a decent mortgage. Despite that I pay £700 a month in rent which is less than a mortgage in my area would be. It makes no sense.

@Bristolbitsandbobs, yes they’re stricter than ever, but affording something in theory is a lot difference to in practice though, I could have borrowed £100,000 more than I did because in theory on our salaries we could “afford it”, however, having rented for many years I know for a fact that we could not afford what the bank were prepared to borrow us and have money left over for repairs and maintenance, especially if the interest rates increased and our payments went up by hundreds of pounds a month. Numerous friends and colleagues have borrowed the absolute max they could get and can’t afford to repair their homes as a result because they are living on such tight budgets. Just because a bank is willing to lend you a certain amount does not mean you can actually afford it.