mortgages - how much are you comfortable borrowing?

[bossykate]

hello everyone

we've been looking at buying a house recently and need to make our final offer tomorrow.

i've done our sums about a hundred times and although it will be tight, i think we can afford the large increase in the mortgage, without being overextended.

i think of myself as risk averse when it comes to debt (v. low mortgage atm compared to income, only have one credit card, cleared every month), so i've been wondering if i'm way off the mark thinking we won't be overextended if we move.

The new mortgage will be 2.52 times our joint gross salaries and the monthly repayment will amount to 35% of our net monthly salaries.

while i don't think that is low, i don't think it would constitute a silly amount either. mortgage cos certainly seem prepared to lend us more if we want it - i don't!

does that seem wildly imprudent, about right, or boringly, accountant-ly cautious to people?

i'd be grateful for any views on this. no need to mention actual numbers if you are shy about it (i am!), the proportions would be more useful in any case if people are willing to disclose them.

thank you all so much!

BK ours is 2.2 times our joint combines salaries (we have just moved) and represents just over a quarter of our net pay. However of course interest rates are low and the problem with a big mortgage is always that a small interest increase results in huge amounts added to your mortgage. Are you going for a longish fix?

I didn't think ours was huge compared to income, however we are finding a bit tough mainly because we pay a blimmin fortune for the nanny too. If dd was in nursery it would be fine as would save £11k net a year but at the moment I'm not happy with her going to nursery so we are biting the bullet.
Also it seems a lot compared to our last mortgage which was only 15% of net pay.

So we went almost overnight from this strong position to having to pay a much bigger mortgage, plus the nanny's costs (£350 per week plus a car). It has all come as a bit of a financial shock!

What are you doing for childcare for the new baby?

When we got our mortgage it was three times my salary and we didn't take dh's salary into account at all (for funny reasons connected with tax it was difficult to substantiate as well as being v small!) Now I earn quite a bit less, but it's still v manageable though we don't spend loads elsewhere. Would love to have less mortgage but not much choice about it. I'm sure you are a veritable paragon of fiscal rectitude though and if you think it will be OK, it will be. Even if you do cut down at work, which I really hope you manage to do. And in a few years time your childcare bills will drop drastically too, with ds1 at his terrible school ( ) and your bump getting some subsidy at nursery....

bk
The problem with the multiples of salary approach is that what you have left over to live on in absolute terms depends how high your salary is in the first place. So some one on £40k borrowing 2.5 times their salary has about £1400 per month left over for every thing else. Someone on £250k borrowing £625000 has about £8.5k left over per month. (These are very rough and ready sums so they won't be exactly right but close enough to illustrate teh point I'm making).

Also everyone has different spending patterns. So even although you know how much you have left over, it would vary a lot from person to person whether they felt that was 'enough'.

However, it does sound to me like you've done your sums and are reasonable confident you can manage. If you are used to living to a budget then I would think you will be fine!

Good luck!

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BK
this is a difficult one to answer as there are so many variable factors. 2.5 x joint was the norm in the eighties when I bought my first house.
Will you get a fixed rate, if not can you accommodate increases in the inteset rate? - I remember the early 90's, when interest rates hit 15%
It also depends on the amount of disposable income , rather than the percentage, as you need a basic amount for living costs regardless of the size of your mortgage (although the bigger the house the bigger the bills apart from food?)
We tend to have a lower mortgage and nice cars, holidays etc, but we have friends with a smaller income, a bigger house and no luxuries - depends what you want.

hi cd, thanks for the quick response. new one will go to nursery, and ds's nursery costs drop in july anyway as he will turn 3. i've taken the nursery costs into account in the overall affordability scenario. if ds gets into the schools we want him to go to, we're laughing.

otherwise, it will be a little tight, but doable, i think.

also i haven't taken into account my annual bonus so those proportions are on salary not income iyswim.

we could also - although i don't want to do this - reduce the amount of AVCs i pay, which is a lot per month on top of a relatively generous pension scheme (not defined benefit, alas, but whose got one of those these days).

also, my calculations are based on me working a 4 day week, so if we were really struggling i could do f/t work.

one final thing, we wouldn't have to borrow quite so much, as we have savings. however, i would like to preserve liquidity in the form of cash savings for a "rainy day" or home improvements and stuff like that. but the option of borrowing less/saving less exists.

i would plan to fix for 3 years.

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Our mortgage is 3x joint salary and represents 32% of net monthly salaries. We moved 6 months ago and this mortgage is over 5 times the size of our previous one. To be honest, it scares me witless, particularly as we do not have a fixed rate (we have an offset mortgage, which works well). Having said that, we felt we had undergeared on our previous property and didn't want to do the same again - our salaries will rise (hopefully) and the debt will decrease. We have a high level of equity in the place and are making overpayments at the moment to get the mortgage to a more reasonable level. We don't want to move until DS has left school (it's so blooming expensive, particularly stamp duty), and so it was important to find somewhere we were happy in (and was big enough) for the long-term. Childcare costs for any second child (your situation?) and school fees, if appropriate, are killers, however. I wish I had checked out state schools better before we had moved.

Our mortgage is based on 3 x dh salary, we had come back from travelling when we got our mortgage and I was temping so I didn't count . Had a large deposit to put down though from funds from our last house sale though so that helped. Our mortgage is about 15% of our net monthly income.

bk I think that sounds about normal to me.

My mortgage is 1.75X my salary and amounts to 12% of our monthly income..... but we have SOOOOO many other outgoings that it's about all we can afford!

It sounds like you've thought it thru carefully, BK, and you know what you can sustain. Apparently DH's brother is looking to borrow 5x his salary to buy a 1 bed flat in Oford! Our situtation:

1st House: we wanted to be able to pay mortage out of either DH or my salary, even if interest rates rose by 50% (would have been to 9% at the time). DH was still on probation in his job, and mine was fixed term contract. So we only borrowed about 2x either of our single salaries.

Now: DH's job is new so the building society will only lend on my salary (£11k/annum). Still, they would lend us 40k on that are they crazy!!!!?? Money would be extremely tight if I had to support the family, and pay any sort of mortgage on my salary esp. if interest rates went up.

SO, we are only looking to only borrow 1-1.5x DH's annual salary, this time. But again, I'm on fixed term contract and DH's employment is hardly totally secure. We looked into getting Mortgage Protection Insurance, but the standard exceptions and exclusions on MPI tended to make us ineligible, and the cost was relatively high for what you get. So we will hold back more of our deposit as emergency money.

Hopefully DH won't lose his job. We will get an Offset ("flexible" ) mortgage and just pay it off as fast as possible, and hopefully after little while have the leeway to take a payment holiday if DH is made redundant. This seems like the best strategy for us.

Blimey Zebra that is irresponsible lending! At least if it was 2 bed he could let out a room to help pay the mortgage.

BK - if you have (and plan on still having) savings have you looked at an offset mortgage? Basically your savings are subtracted from the mortgae when the interest is calculated, so you don't get any interest on your savings (which is taxable anyway) but you pay less on your mortgage. And of course your savings are still accessible if you need them. Particularly beneficial if you are a higher rate tax payer, but worthwhile even if you're not. We have ours (about 0.85x joint income, or 1.6x DH's), with First Direct, but I think a few others (like this one do something similar.

BK - you're worried? We've got no savings, no pension (Equitable Life - ha!!!) nothing solid let alone liquid. No bonuses, zilch. I don't know if that makes you feel at all better?

2.5 times joint salary of DP and me. However childcare costs are about twice our mortgage. Aaagh !!!! If we remove childcare costs from our income then we are borrowing 3.5 times our joint salary. Can't wait till they go to nursery.

Our mortage is 2 x DPs salary - he has just changed lenders and got a much better deal (thanks whoever recommended Alexander Hall XXX) - hopefully when divorce comes through we shoudl be able to at least knock a quarter of it off if not a bit more - well that myplan - DP doesn't seem to care whcih I can't understand -I always thought it best not to have any debts even if that measn you have no savings???

The amount we owe to our lender is now about 1.5 times my salary, but it was a bit more than that when we initially took out the mortgage, probably just under twice my salary.

WE went for a twenty year term, rather than a twenty five year term.

But if we do up our cellar we will have to borrow a lot more to add onto the mortgage

We've borrowed about 1.75x our joint annual income. Repayments are about 15% of net income.
We have figured out we could easily go to 3x joint salaries but we really don't need a bigger house (although I occasionally crave one in the false belief that then DH wouldn't leave his stuff lying about).

3.5 years ago we borrowed 2.2 x joint income. I was 14 weeks pregnant then and dropped to woorking 3 days a week. Currently (having borrowed a little more for home improvements but also paid some off) we are at about the same although I am only working 3 days through pay rises (mainly DH's). We tooke the mortgage over 22 years.

Mortgage payments (including endowment on half of value and additional payment to off-set likely shortfall in endowment) are about 23% of net income.

So BK are you going for it?

Mortgage we were going to take out was 3.15 joint basic salaries, and monthly payments would be 26% of net monthly income. But in 6 months I stop being paid, and it would then turn into 5.4 times dh's salary, and 45% of net monthly income. (shit that's scary - but we won't have childcare costs then, which were another 17% of net monthly income)
Having said that, we were hoping to be able to clear the mortgage within 3 years using dh's bonus so are comfortable with being quite highly geared.

Sounds fine to ignorant old me, bk. Good luck with getting the new place.
LOL @"veritable paragon of fiscal rectitude" Aloha..

We were advised recently, that providing you were not asking to bnorrow more than 60% of the value of the property, the multipliers became virtually academic. We have had clearance for 4 times my dh's salary as a result. But were told they would probably loan more if we wanted - and it was still under 60% !!!!!!
We will not go any higher.

thank you so much everyone

there are some really great points here, but i can't stop to respond now as i'm just about to leave work and go home to go through it all with dh.

will get back to you all tomorrow and let you know.

tillymint that is cynical banks for you.

If they only let you borrow up to 60% then when property prices go down, interest rates soar and you default on your mortgage they are guaranteed (pretty much) to still get their money back. They aren't doing it in your interests!