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?

If you can afford 2500 and you only pay 1800 now - Save the 700 difference.

It will take you less than 3 years to get your 20k deposit. Lucky you! Took me much longer to save up as I didn’t earn anywhere near as much.

@Student133 the HTN equity scheme still requires a 5% deposit so is not a 100% mortgage. The HTB element is a second charge, repayments only begin after 5 years.

100% mortgages are not good economy, irrespective of any perceived demand.

Sorry just seen you only pay 1300 a month! So if you can afford 2500 rent then you can afford to save 1200 a month! Less than two years. Less moaning, more saving.

Here you are:

This might help

www.mortgagegym.com/blog/why-a-deposit-is-important-when-buying-property.html

@mrsm43s and @Tiredtiredtired100 thank you that makes a lot of sense

@Gtugccbjb I’m not moaning? I’m questioning. We’re saving nearly £2000 most months at the moment and had planned to buy next year, but as I think it likely 95% mortgages will be off the table for a while I think it’s more likely we’ll be saving a 10% deposit over the next 5-6 years (my income as about to drop as DC1 is on the way, but hopefully DHs income will keep going up)

@Bluntness100 mortgage payments would be more than we’re paying in rent, at least a few hundred more based on what I think we’re likely to borrow and varying interest rates.

Would it be worth looking at Help to Buy schemes/shared ownership? That’s how we got on the property ladder with a smaller deposit. We initially bought a 40% share (paying rent on the remainder) and gradually increased our share. We now own 100%. It was loads of admin but at least we haven’t had to move each time we remortgaged!!

Mortgages are regulated meaning banks have to apply various stress tests on your mortgage to satisfy the FCA
Eg checking if you can afford a 3% rise in interest rates. Having a disposable income left over after this for emergencies, usually expressed as a percentage of your overall net monthly income eg 5% left over.

As well as this the bank has its own policies to mitigate risk and protect the investment it has made in you. This means they will also allow for other eventualities and might discount elements of your income to see if you could still afford it if that income wasn’t fully present. Particularly income that might be deemed as unsustainable.

Another tool they use is to measure the percentage of your income going towards debts including the proposed mortgage payment. Eg if your income is £1000 they might not approve the mortgage if more than £400 per month is going out towards the mortgage car finance loans and credits cards just as an example.
They also consider that as a tenant you literally only pay rent. Not repairs, insurance etc. You will have to be able to maintain the property in order to protect the building which is security for their loan.

As others have said the deposit makes sure if house prices slump there is less risk the bank will lose money.

Remember the bank is in this to make a safe profit for its shareholders and doesn’t want any costly hassle of trying to sell a property for more than the loan. They don’t want to have to pay staff to chase clients for money or take them to court. So they apply all these measures and checks to make sure you are a safe candidate.
That’s why often people can’t understand why a bank might say they don’t meet affordability criteria even though they think it affordable themselves.

Advice: chat to your bank and get a feel for what they are looking for and work towards it.

Have you actually spoken to a mortgage advisor? We are in the process of buying our first house. It's a slightly different situation perhaps, because we have a large deposit (40%), but I was actually shocked at home much the bank would lend us. I think it was 490K. We earn probably about 100K combined, depending on the year. Our mortgage will be about 1300 per month with the current interest rates. That was certainly a lot more than any of the online calculators would say we could get, by probably 150K at least.