The True Cost Of A Mortgage

[Lepista]

Lets take the average mortgage: £165,000.

Over the lifetime of your servitude to the bank, you are having to pay approximately double this, to account for interest: £330,000

To earn this amount of money, you are taxed approximately 50% of your salary. i.e. to have £330,000 "spending money", you need to have earnt £660,000.

Thus the annual salary that the mortgage alone is taking up, assuming the average house price, is £26,400.

To make this reasonable, the percentage of your salary that goes on rent shouldn't really be more than around 50% (being generous here).

Thus to buy the average property, you need to be on a salary of somthing like AT LEAST £52,800.

Now, the average UK salary is somewhere in the region of £23,000.

Quiz question: What level do house prices have to drop to to make the above viable?

[LiveAndLetBuy]

Lets take the average mortgage: £165,000.

Is that the average mortgage or the average house price?

Over the lifetime of your servitude to the bank, you are having to pay approximately double this, to account for interest: £330,000

Assuming a 25 year mortgage at 6% interest, I work out you pay £247,500 interest. I'm not sure you can call mortgage repayments a cost, because they reduce your debt.

To earn this amount of money, you are taxed approximately 50% of your salary. i.e. to have £330,000 "spending money", you need to have earnt £660,000.

Thus the annual salary that the mortgage alone is taking up, assuming the average house price, is £26,400.

To make this reasonable, the percentage of your salary that goes on rent shouldn't really be more than around 50% (being generous here).

Thus to buy the average property, you need to be on a salary of somthing like AT LEAST £52,800.

Now, the average UK salary is somewhere in the region of £23,000.

Quiz question: What level do house prices have to drop to to make the above viable?

IIRC the average salary of house buyers is about twice the average salary (let's say 40k), and the long term average salary multiple for mortgages is 4 x salary.

So roughly 40x4 = 160k, which sort of explains the current average house prices.

Also maybe you should consider the average salary over the lifetime of the mortgage (the next 25 years) which should also be well over 23k.

[Dorkins]

This kind of calculation is exactly why house prices revert to 3.5 years' gross single income time and time again. Add on typical interest rates over 25 years and that 3.5 years becomes 7 years, stick on income tax and NI and it's more like 11 or 12 years. If the average man has a working life of 44 years, a quarter of them are accounted for by paying for the house. When house prices hit 4.5x joint, that's more like 25 years of full time work just to keep an average roof over your head. Even couples who both work full time will find it difficult to sacrifice a quarter of a century of full time labour purely to pay for accommodation. That does not leave a lot of money/energy/time for raising children, buying food, saving for old age, family emergencies, home repair etc.

[ccc]

Assuming a 25 year mortgage at 6% interest, I work out you pay £247,500 interest.

I am pretty sure 5.9% over 25 years works out at almost exactly double. Maybe not though. Plenty of calculators online.

Edit - I see interest. ******ing lot anyway !!

Edited January 14, 2011 by ccc

[SomethingHasToGive]

This kind of calculation is exactly why house prices revert to 3.5 years' gross single income time and time again. Add on typical interest rates over 25 years and that 3.5 years becomes 7 years, stick on income tax and NI and it's more like 11 or 12 years. If the average man has a working life of 44 years, a quarter of them are accounted for by paying for the house. When house prices hit 4.5x joint, that's more like 25 years of full time work just to keep an average roof over your head. Even couples who both work full time will find it difficult to sacrifice a quarter of a century of full time labour purely to pay for accommodation. That does not leave a lot of money/energy/time for raising children, buying food, saving for old age, family emergencies, home repair etc.

Surely if it was about long term affordability and risk reduction it would be a multiple of net income rather than gross income.

The gross income connection just sound to me like a distortion the banks have added, as they based mortgages on a gross salary multiple ( except when they were basing it on a completely fictitous number ).

[Lepista]

Assuming a 25 year mortgage at 6% interest, I work out you pay £247,500 interest. I'm not sure you can call mortgage repayments a cost, because they reduce your debt.

That would be true with an interest only - on a repayment, your capital debt reduces each year, so you're paying less interest (well, the same interest rate on a smaller pot).

It pretty much works out at double.

[LiveAndLetBuy]

I am pretty sure 5.9% over 25 years works out at almost exactly double. Maybe not though. Plenty of calculators online.

Edit - I see interest. ******ing lot anyway !!

Yup. Although to be fair, whenever I've taken out a mortgage I have been presented with the figure for how much I'll end up paying altogether. It's so big that I think most people prefer to ignore it and think in terms of monthly payments only.

[LiveAndLetBuy]

That would be true with an interest only - on a repayment, your capital debt reduces each year, so you're paying less interest (well, the same interest rate on a smaller pot).

It pretty much works out at double.

True, but that means that with a repayment mortgage you pay less than 247,500 over the term.

I think it only works out as double if you include the repayments as well. But I don't think you should for this type of calculation because they're not really a "cost".

[Lepista]

True, but that means that with a repayment mortgage you pay less than 247,500 over the term.

I think it only works out as double if you include the repayments as well. But I don't think you should for this type of calculation because they're not really a "cost".

It's how much comes out of your pocket, that you can't spend on anything else. i.e. a cost.

[billybong]

Another thing the banks always bear in mind when helping to escalate prices.

Paying double £160,000 is paying a lot lot more money than paying double £80,000.

Edited January 14, 2011 by billybong

[24gray24]

Any sensible parent, living in a 6 bedroom house they paid thrupence ha'penny for in 1970, is going to insist their children live with them for 6 years, while saving up to pay off a house with no mortgage in 6 years: 6 x 26,000 = 154,000.

[ccc]

The sort of place that I may buy was about 160k at peak. Now about 140k. I expect it to go to at least 120k. Around 100k would be a sensible long term figure IMO.

So I decided to stay at home and save up instead of getting a mortgage back in 2006 - like everyone was telling me I should do.

If I had got a mortgage I would end up paying something like 320k. And I would not own the place outright until I was 55.

If the prices go where I expect them to ?

I will have paid extra rent of about 25k. However the house will cost me say - 120k. And I will own it outright at age 35 instead of 55.

It will cost me in total 145k. Pretty big saving compared to the other option of 320k.

Potential saving of £175k.

Thats not to be sniffed at. Most people dont do these calculations though. As Liveandletbuy says most just look at the monthly payment and that is it. Mental IMO.

[Lepista]

Any sensible parent, living in a 6 bedroom house they paid thrupence ha'penny for in 1970, is going to insist their children live with them for 6 years, while saving up to pay off a house with no mortgage in 6 years: 6 x 26,000 = 154,000.

It's actually even better than that - the children would have significantly reduced bills - no TV licance, little / no heating / lighting / energy bills, little / no maintenance costs, little / no council tax...

Just the huge costs of having to go out and get plastered every Friday / Saturday night to numb the pain of having to live at home.

[exiges]

Thus to buy the average property, you need to be on a salary of somthing like AT LEAST £52,800.

Now, the average UK salary is somewhere in the region of £23,000.

What about wage inflation ? Sure it's a struggle today, tomorrow with Mervs efforts it gets that little bit easier (theoretically anyway)

I think my parents mortgage was £35 a month back in the day, nearly broke them, then came inflation.

[LiveAndLetBuy]

It's how much comes out of your pocket, that you can't spend on anything else. i.e. a cost.

So if I lock say 1000 pounds away in a 25 year savings account, the cost to me is 1000 pounds?

[CasualBear]

This is a good for illustrating this point:

http://www.wolframalpha.com/input/?i=30-year+mortgage+at+5%25

[eric pebble]

Lets take the average mortgage: £165,000.

Over the lifetime of your servitude to the bank, you are having to pay approximately double this, to account for interest: £330,000

To earn this amount of money, you are taxed approximately 50% of your salary. i.e. to have £330,000 "spending money", you need to have earnt £660,000.

Thus the annual salary that the mortgage alone is taking up, assuming the average house price, is £26,400.

To make this reasonable, the percentage of your salary that goes on rent shouldn't really be more than around 50% (being generous here).

Thus to buy the average property, you need to be on a salary of somthing like AT LEAST £52,800.

Now, the average UK salary is somewhere in the region of £23,000.

Quiz question: What level do house prices have to drop to to make the above viable?

Nah!!! Just take out a

LIAR LOAN

---- then all will be fine and dandy!!! [not].....

[ccc]

This is a good for illustrating this point:

http://www.wolframal...ortgage+at+5%25

17 years to start paying more principal than interest.

At the start you really are paying nearly all interest. So waiting for a couple of years to see what happens really is not big deal.

Well unless house prices 'take off' again

[maxdiver]

I have a solution - the world needs innovative solutions to help the risk-takers succeed.

Interest Only mortgages were a great idea - and BTL lending restrictions being removed was even better.

BUT - has anyone thought of an interest free mortgage?

It's simple - you borrow the money and agree to pay it back after a period of say 25 years - or 40 (to reflect how much longer we'll all be working).

You can borrow only a minimum of 6 times your future salary and the interest rate is zero but you have to agree to buying a new sofa and carpets every 2 years - new kitchen and bathroom every 5 years and a new bowl of sticks in your livingroom monthly - candles will be compulsory.

this would not only help support house prices and give a fair deal to hardworking families - it would create lots of creative jobs in interior design.

[BelfastVI]

Unfortunately the rent you pay for the same house is also taxed at 50%, if you are in that same tax bracket.

The mortgage repayments at 6% interest rates will be just over £1,050 per month. This is no doubt more expensive than renting the same house. However in 25 years you will own the house out right. Houses will, even if Harrason is not correct, have increased with inflation. Look at prices over any 20 year period and they, at the very least will have been a good hedge against inflation. At times your purchase may look expensive, at other times it will look very cheap.

Not buying and renting is an option but offers other risks. At the end of the 25 years you still need to rent. Will you have been able to invest the money saved in something else that will pay for housing after retirement.

It is a risk most of us have to face. Up until the 1960 60% of people rented. that has reversed to today well over 60% own (mortgage their property). I can see that falling back again as people take more care over the decision to buy.

[Bloo Loo]

Unfortunately the rent you pay for the same house is also taxed at 50%, if you are in that same tax bracket.

The mortgage repayments at 6% interest rates will be just over £1,050 per month. This is no doubt more expensive than renting the same house. However in 25 years you will own the house out right. Houses will, even if Harrason is not correct, have increased with inflation. Look at prices over any 20 year period and they, at the very least will have been a good hedge against inflation. At times your purchase may look expensive, at other times it will look very cheap.

Not buying and renting is an option but offers other risks. At the end of the 25 years you still need to rent. Will you have been able to invest the money saved in something else that will pay for housing after retirement.

It is a risk most of us have to face. Up until the 1960 60% of people rented. that has reversed to today well over 60% own (mortgage their property). I can see that falling back again as people take more care over the decision to buy.

anyone can afford to buy a house these days....well, if the banks would lend them money they could.

Gone are the days of "affordability"...bankers need to ensure they offset the risk of default.

And if Merv decides to keep rates low but to resell QE back into the economy, every penny profit will need to be fought for.

[maxdiver]

The question of "should you rent or buy - and buying is the best because you get a house at the end" is a sham.

The money you save by renting can be used for investment in more productive ways that houses.

Ok, I own my flat - and it would cost me £600 per month to rent or about £150,000 to buy.

On a 4% mortgage - the repayments over 25 years would be about £800 per month.

So - that £200 per month could be used to invest (and pay your dues to the creamers).

You also don't have to pay for maintenance on your place - you have the ease of moving for work and a lot of other benefits (and problems too).

[The Spaniard]

More generally, what is the true cost of a trading nation borrowing into existence its means of exchange from commercial issuer-lenders, rather than issuing publicly, debt-free, an adequate amount of currency with which to conduct its business?

It is this fundamental choice of money system that lies at the root of our debt slavery.

[SomethingHasToGive]

The question of "should you rent or buy - and buying is the best because you get a house at the end" is a sham.

The money you save by renting can be used for investment in more productive ways that houses.

Ok, I own my flat - and it would cost me £600 per month to rent or about £150,000 to buy.

On a 4% mortgage - the repayments over 25 years would be about £800 per month.

So - that £200 per month could be used to invest (and pay your dues to the creamers).

You also don't have to pay for maintenance on your place - you have the ease of moving for work and a lot of other benefits (and problems too).

Can you guarantee that given your ability to put aside £800pcm to rent+investment, your investment fund will cover your rent in 25 years time? At least with a mortgage you can ( barring upkeep ).

Yields on investments are low, that's one of the reasons why we have a property bubble in the first place, people were buying houses as a pension.

[arrgee1991]

I have a solution - the world needs innovative solutions to help the risk-takers succeed.

Interest Only mortgages were a great idea - and BTL lending restrictions being removed was even better.

BUT - has anyone thought of an interest free mortgage?

I have thought of a no payment mortgage.

It works like this, you buy a house for say £250K and the bank keeps applying interest at LIBOR + 2%. When you come to sell the house, if it has gone up in value by more than LIBOR+2% a year, the bank works out the total and you get the positive difference minus a fee. Obviously there is the chance you could be down on the deal if prices don't rise fast enough or fall when you sell. So all you pay for is an insurance premium to cover any shortfall. The premium would change over time based on the current sale price.

Great for house buyers as it is no risk. I see it as a form of equity release without the equity. Can't see it happening though :-)