FTB in London - what multiple of your salary are you borrowing?

[Etherealhedgehog]

Just that really - I know we can get 4.5x, I also know that back in the day the advice was not to borrow more than 2.5x or something along those lines - but the reality is that now (on our decent but not astronomical incomes) it's not possible to buy a place in London (which is my hometown - so not keen on leaving) if we only borrow 2.5x.

With interest rates as they are now we've calculated that we could manage monthly payments for a 4.2x mortgage (with a 15% deposit), but I'm aware that interest rates will go up at some point. In terms of outgoings, we've got to get through the next two years and then free nursery hours kicks in, which will make a big difference as DD is in nursery full-time.

I guess I'm just interested to know what people have gone for? DP and I are both naturally quite risk averse, but with a 4.2x mortgage we have the opportunity to buy a house, instead of a flat, which we would love to do (and will help us to avoid some of the risks associated with owning a leasehold property - so there's that).

If you bought in London many moons ago by borrowing 1.5x your salary then I am thrilled for you but please don't tell me that!

I don't think being risk averse is a problem given interest rate rises are on the horizon. My partner & I bought a house in London 5 years ago at 4x salary & would have felt uncomfortable going beyond that. More important for me was keeping the term to 25 years. So many of our peers have done 30 & in some cases 35 which I think is crazy. Having said all that, we had a hefty deposit as our families happen to be london based so had benefited from the astronomical rises in property prices here so could help out.

If a small increase in salary multiple gets you a house vs a flat though, I think that might be the better long-term option.

Is that 4.2 times a a single salary or 4.2 times joint?

We bought 10 years ago on a 4 times the highest earner's salary because we wanted kids. 9 months later we were down to one salary!

Don't just focus on the multiple - mortgage lenders also look at affordability (which includes outgoings and debts).

Model the next 2 years on a fixed rate and also a jump in rates at that point.
Don't forget to look at stamp duty and deposit. Both of which should ideally be paid in cash (although stamp can be added to mortgage).
Include some overlap with rental too, and the delay in cash flow to get rental deposit back.

We just got a 25 year mortgage at 4.75 x our combined salary. We did have a 55% deposit though so we got a 5 year fixed rate of 1.19% which means our mortgage payment per month is a comfortable amount. If you can get a good deal, in your position I would stretch myself as far as possible to get a house rather than a flat. That way you’ll be able to stay longer rather than having to fork out stamp duty and moving costs when you find you have outgrown the flat in a few years time.

my first property i borrowed 5X my salary (single at the time with a 30% deposit).

My second home joint with DH I borrowed 4.5x our salary with a 45% deposit.

I've never heard of anyone saying only borrow 2.5x your salary. You'd never buy anywhere in london for that

@Rollercoaster1920 - 4.2x combined salary - 4x single salary would buy us a shed. This is the problem I face - all the 'sensible' advice is based on house prices ten years ago, when they were already far too high but not astronomical. We've already had a mortgage in principle for 4.5 so I know the lenders consider that affordable for us, it's just figuring out where our own personal risk threshold lies. Not helped by the fact that lots of people who bought a long time ago (including my own parents) proudly say that they maxed out and bought the most expensive property they could, which has paid off in the long-run etc etc - but I suspect that back then lenders were requiring larger deposits/lending smaller multiples (because houses cost less, so would still sell with smaller mortgages) - so this approach perhaps makes less sense now (if it ever did).

We have cash for stamp duty and a decent deposit (15-20% depending on where we set our max budget).

Your advice to model for the next two years and then model again is good - thanks.

We got a 30 year mortgage at just under 4x salaries, but have been paying it off as if it’s a 25 year mortgage with overpayments. It helps to know we can reduce payments if needed / absorb a bit of extra interest rate without too much stress!

Just be prepared that the free nursery hours don't make that much difference if your child is in full time. It'll be either 15 or 30 free hours dependent upon your circumstances.

If your nursery contract is a 51 week contract they'll divide the 30 free hours over the 51 weeks so I think it works out at 22 hours free per week which in our case made a barely recognisable dent in our monthly nursery fees. Be careful that you're not budgeting for "free nursery" rather than the correct number of free hours!

@StuckOnHoliday this is a good point, thanks. We'd get 30 free hours and definitely not expecting that to equate to free nursery but we are assuming it will at least free up a few hundred a month that could then go on something like increased mortgage fees.

Good to hear that 4-4.5x is not considered bonkers, though our 15-20% deposit doesn't feel quite as good as I thought it was compared to some on here. I think if we do try and stretch to a house we would also be getting a 30 year mortgage but trying to pay it off faster if possible, eg. as childcare costs reduce.

My concern is partly that we both work in the charity sector, where wage structures are relatively flat, so can't expect to see a very significant jump in our incomes at any point - so we won't have the funds to upgrade to a house in a few years, whether or not we feel like we're outgrowing a flat. We had also been looking at ex-council maisonettes, which offer the space and garden - but got burned by undisclosed major works fees on a place we had an offer on and have decided to avoid all ex-council places as a result - the risk if we were to face a major works bill at some point in future is just too great. This unfortunately greatly reduces the number of leasehold options, particularly if you want a garden / a bit more space.

I became an Excel expert when buying! We had a reasonably big deposit after 10 years saving so the modelling included thresholds of LTV bands where the interest rates were quite different and made an appreciable difference monthly.

4.2 times joint sounds a bit risky to me because if you have a second child will it even be worth working for one of you? Do the maths on that.

However, based on your sector I wonder if you might be able to both go part time which is so much more tax efficient. We copped every bad point of being a single earning family with one higher rate tax payer so had to pay back child maintenance and didn't qualify for 30 free hours, paying tax at 40% etc which made things tighter than a 'good' salary might be expected. If the income had been split jointly then we'd have been so much better off (I'm all for bringing back married couples transferrable allowances!).

The thing I wanted to add - we stretched for a house in a less-good location over a flat in a better area and are very glad we did. Moving costs now make even a sideways move sooo expensive it just isn't worth it. We managed to buy a 3 bed ex-council wreck, and 3 years later had 2 children so needed the extra space. We don't have leasehold charges and can put off most major work if needed (we have needed replacement windows for 10 years!). If you have family locally then are they handy so could help with DIY work? That can really make a difference.

Good luck!

3.7x joint salary

Last year 4.2x joint salary with 15% deposit; 25yr term; not planning children so barring other catastrophe we will both keep working and both salaries will be rising around 20-30% more over our careers. This stretch has meant we can afford a nice forever house and garden, not planning to move ever basically, at least not until retirement! We were FTBs in late 30s/early 40s.

Such a tough one! We borrowed 2.6x and going up to 4.5x would have got us a hell of a lot more but the monthly repayments would have been so high. However, we always knew we didn't want to be "mortgaged to the hilt" as, like you, we didn't expect massive bumps in pay. Now, 6 years later as the mortgage is paid down, we have a really healthy level of disposable income.

Having said that, our flat is very small and we always wish we "COULD have spent more", but actually what I think we wish is that your money went further down here, so that it wasn't always a choice of "crap property, no space" or "massive mortgage, no disposable income". Sigh!

Good luck OP! I hope you find the property you want at a decent price.

I don’t know anyone buying at under 4x joint salary! It’s pretty normal

Also, it’s not just about the multiple, it’s about what you have left as disposable income

As our salaries have gone up, we’ve felt more comfortable taking on bigger mortgages and monthly payments because of what’s left over

If your mortgage payment is 50% of take home pay of £3k, things will be tight
If it’s 50% or take home pay of £8k, that still leaves a very sizeable amount of disposable income, even if a lot of people would have a fit at the idea of a mortgage payment being 50%

Not meaning to hark back but remember that when people were basing their mortgage on 2.5 x salary, interest rates were 15%.

Even cautiously, you need to work with where things are in the moment - obviously bearing in mind that mortgate rate rises are imminent.

Would a 5 year fix make sense? Then if you are only planning 1 DC she would be in school and the costs are so much lower.
Realistically the interest rates are unlikely to rise much beyond 1-2% in 2 years. Would that be affordable? Would you by that time be in a better LTV where mortgages are cheaper?

We bought just under 5 years ago and borrowed as much as the banks would lend. Prices have risen so much that unless we inherit or win the lottery we will never be able to afford a bigger place. Try to buy something you'd be happy to live in for a long time!

Just on a different tack, don't completely discount a flat. They have never been less popular, following cladding issues and Covid when everyone is desperate to move to a house for the garden and the home office.

Plenty of folk in European cities raise families in flats.

I only say this as we are downsizing our young family to an ex LA flat in a really lovely area (Home Counties) from a house in a much rougher area.

It has 3/4 bedrooms and a communal garden. No cladding, very low leasehold and ground rent.

We have struggled with big mortgages for years and the stress is shit. We had to drop to one wage because one of our kids is disabled and needs a full time carer.

I wish we had done it from the get go, all that worry and struggle was awful.

Ours worked out as 3.2x joint income 4 years ago, 15% deposit, 35 year term but with high overpayments. It was very comfortable. This was pre kids though…we’re now planning another move with one in nursery and having to think hard about sensible affordability as soon as there’s two sets of childcare to pay for!

Do look at the actual cash amount you’ll have left over on those affordability calculators though when you’re working out how risky things are. Sometimes it looks like the % is low and tells you off, but if you have decent salaries the actual ££ can go a lot further.

thanks all - very reassuring and some good points made. @MrsBobDylan we're not discounting a flat per se but the majority in the size we are interested in are ex-council and we have now come across quite a few examples of leaseholders being hit with significant bills for major works (the one on the place we offered on was 35k.....) - it is exactly to avoid the worry and struggle if we were to get hit with a bill like that, that we want to avoid ex-LA. But you make a good point - we definitely won't blanket discount all flats.
Certainly if you'd asked a year or so ago that was what I would have expected to be raising my family in! It's only as we've done some more research on neighbourhoods and been lucky enough to get a bit of deposit help from parents to top up what we have saved that a house has become a (stretch of a) possibility.
also @Callisto1 I actually didn't know you could get 5 year fixed term but that's a good point - we'll look into that. We're not yet entirely decided but erring on the side of not having a second child (not particularly for financial reasons but it's an extra plus to sticking with one) - so that would help alleviate some of the risk down the line - though I guess that means we need to go through that thought process sooner than we had expected (I'm late 30s, so we'd be making that decision soon anyway).

@LemonViolet that's almost exactly our situation numbers-wise if we go for the larger mortgage - except we have a child, but probably not another. Also planning to buy a forever place and not move (/couldn't afford to)

I doubt you could afford a house if you can only afford an ex Council flat! Those statements just don’t add up unless you are not comparing the same location.

My DD got 4 x taxable earnings. She’s self employed. Had a 35% deposit though and very likely to have increased earnings. 4x joint is possible. She’s paying back over 18 years. You can pay it back over 30. There’s no need to have it over 25.

I would look at a flat. There are some great ones and the right one is still an asset in the right location.

@TizerorFizz

I doubt you could afford a house if you can only afford an ex Council flat! Those statements just don’t add up unless you are not comparing the same location.

My DD got 4 x taxable earnings. She’s self employed. Had a 35% deposit though and very likely to have increased earnings. 4x joint is possible. She’s paying back over 18 years. You can pay it back over 30. There’s no need to have it over 25.

I would look at a flat. There are some great ones and the right one is still an asset in the right location.

I think OPs point is they can afford a flat at the lower multiple, or if they stretch to 4.5x, they can afford a house

Given that ex-LA flats around me go for over £500k, it makes perfect sense that if OP doubles their budget with extra borrowing, they’ll be able to buy a house

How can they double their budget to move from an ex council fiat to a house though? With a multiple of one income vs two incomes I can see that but is the op able to get anything with just one income? I thought 2 incomes were needed to buy anything but it was the multiples that were the question. Maybe I’m completely misunderstanding though!

@SW1amp @TizerorFizz exactly this - the house is if we stretch the budget, though it's far from doubled because we're also talking about different areas - basically the choice is a bigger mortgage to buy a house in a less nice area or a smaller mortgage to buy a flat in a wider choice of areas. That's totally believable in London at least.

Yes I know. That’s where DD lives. There’s big price differentials in her Borough! Ex council is cheaper and not all of it is needing work done. I quite like maisonettes. Not sure what your budget is but the market might get new additions in the early spring. Although in DDs area the EAs are asking if people want to sell! The market seems busy.

DDs flat has maintained value (possibly now gone up) as it has 2 bathrooms and is in a first class location for transport and is in a conservation area. So look for this type of flat and you future proof a bit.

@TizerorFizz

How can they double their budget to move from an ex council fiat to a house though? With a multiple of one income vs two incomes I can see that but is the op able to get anything with just one income? I thought 2 incomes were needed to buy anything but it was the multiples that were the question. Maybe I’m completely misunderstanding though!

Because they are thinking of borrowing more money! That's literally the sole point of this thread!

eg OP earns £50k, her DH earns 70k
2.5x multiple allows them to borrow £300k
15% deposit is £55k = total budget of £355k which buys a flat

compared to 4.5x multiple allows them to borrow £540k
The same deposit allows them to borrow at a 90% LTV for a total budget of just under £600k

There are PLENTY of areas in London where £350k gets you an ex-LA flat and £600k gets you a house

And that's me taking a total stab in the dark at their salaries. They could earn more than that of course

@SW1amp sadly we earn less! Combined salary is just under 90k. Tbh part of this thought process/thread is because, until recently I had just assumed there were no parts of London (at least inside of zone 6!) where we could afford a house. But we have recently changed our geographic focus for a number of reasons and it seems it might just be possible if we stretch the mortgage and are willing to live with rather retro interiors while we gradually do a place up (whether we want the bother of that is a whole other question!). And in either case we want three bedrooms and a garden - which we might end up compromising on and does of course limit the available leasehold places - mostly to ex-council maisonettes but there are also ground floor flats in conversions, which we will look at. We realise we might have missed the boat and have to drop the garden or third bedroom anyway but it's still really useful to know what scale of mortgage people are getting and what people think it's worth extending themselves for