What Is A Sensible Income Multiple For A Mortgage?

[willing]

I was wondering what this forum thought was a sensible income multiple for a mortgage. This is not as simple as it sounds as different multiples will be sensible for different people. So taking two typical FTB stereotypes, the young professional FTB with expected high salary growth, and your average FTB with moderate salary growth. So what do you reckon:

1. What is a sensible multiple for a professional young (20s, 30s) FTB with 10% pa average salary increase?

2. What is a sensible multiple for a young (20s, 30s) FTB with 3% pa average salary increase?

My personal thoughts are:

Case 1. - 3.5 x joint 4 x Single

Case 2. - 3 x joint 3.5 x Single

Or am I being too conservative and sensible? The point is have our accepted multiples been influenced despite our best efferts by this current bubble??

[geranium]

I was wondering what this forum thought was a sensible income multiple for a mortgage. This is not as simple as it sounds as different multiples will be sensible for different people. So taking two typical FTB stereotypes, the young professional FTB with expected high salary growth, and your average FTB with moderate salary growth. So what do you reckon:

1. What is a sensible multiple for a professional young (20s, 30s) FTB with 10% pa average salary increase?

2. What is a sensible multiple for a young (20s, 30s) FTB with 3% pa average salary increase?

My personal thoughts are:

Case 1. - 3.5 x joint 4 x Single

Case 2. - 3 x joint 3.5 x Single

Or am I being too conservative and sensible? The point is have our accepted multiples been influenced despite our best efferts by this current bubble??

We would borrow a maximum of 3.5x 1st salary plus 1x 2nd salary. That's assuming neither of us will need to take a salary cut at any point or be out of work for any length of time. Even 3.5x + 1x feels excessive (if you factor in higher interest rates at some point for example) and we will be borrowing less if we can get a reasonable offer accepted.

I can think of two reasons to be cautious on the multiples:

* If you plan more than one child, count on one income being lost for years, possibly for ever. If you're planning just one child, take into account nursery costs (up to £12k pa) & extra expenses?

* FTBs are getting older, so may not be able to count on salary escalation. A mid-30's salary might be as good as it gets.

[OzzMosiz]

I would personally borrow on my own at 3-3.5 x salary - gives me good room for incase I need to find a new job for less money.

If I buy with my girlfriend, then it wouldn't be any more than 3 x joint salary, whatsoever! Incase one of us

were out of work or an 'accident' happened!

[CrashBear]

I to would go for 3 - 3.5 time salary, although chances of that at the moment aren't high.

[Ignorant Steve]

I was wondering what this forum thought was a sensible income multiple for a mortgage. This is not as simple as it sounds as different multiples will be sensible for different people. So taking two typical FTB stereotypes, the young professional FTB with expected high salary growth, and your average FTB with moderate salary growth. So what do you reckon:

1. What is a sensible multiple for a professional young (20s, 30s) FTB with 10% pa average salary increase?

2. What is a sensible multiple for a young (20s, 30s) FTB with 3% pa average salary increase?

My personal thoughts are:

Case 1. - 3.5 x joint 4 x Single

Case 2. - 3 x joint 3.5 x Single

Or am I being too conservative and sensible? The point is have our accepted multiples been influenced despite our best efferts by this current bubble??

Excellent post. And as you rightly say it depends on the individuals and their circumstances.

We are 40 with 2 very young kids and are limiting ourselves to 2x joint. We are helped of course by the equity built up ove the years.

I think many mid 30s FTBs are going to be forced to resign themselves to renting long term if they want a family as well. It's been said many times before that the social effects of the price increases are the most invidious.

[?...!]

Depends on what the climate is when you borrow.

But 3.5 is a fair multiple for an affordable asking price assuming no spells out of work.

If I was contracting I would be looking for at least a 50% deposit.

A 25 year mortgage would typically cover two economic cycles. BIG BIG RISK, who the hell can predict what the next cycle will bring??

I would only take out a mortgage at a time when wage inflation will help erode the debt (look at how you can make money from China’s growth whilst sitting at home) and only ever a ten year mortgage as this only really covers one cycle and is much easier to forecast. Try and save a substantial deposit for such a time. Paying over a longer period means you repay a disproportionately larger amount.

Too many people pay attention to small blips and tweaks in the markets, and ignore the longer term trends.

In the past I have made the analogy that this is like trying to predict plate tectonics from data gathered on recent high & low tides. The tides will not tell you where the coastline will be in ten million years.

You need to focus on data accumulated over a comparable time frame. A HPC could take 5 years. Data referring to Q4 2005 is an irrelevant waste of time.

DO NOT FOCUS ON FRITS AND BLIPS, THEY ARE UNPREDICTABLE. LOOK AT THE TREND, SEE HOW IT REPEATS.

[Guest Fiddlesticks]

Call me a reckless fool, but you all seem to be erring too far on the side of caution. 3.5 times salary was the old multiple from a time when borrowing was far more expensive. If you can fix at 5% for ten years you can afford to borrow more.

[?...!]

Call me a reckless fool, but you all seem to be erring too far on the side of caution. 3.5 times salary was the old multiple from a time when borrowing was far more expensive. If you can fix at 5% for ten years you can afford to borrow more.

In times of higher IR there was greater wage inflation. This wage inflation eroded the debt in real income terms.

IR's are lower but wage inflation is very sticky due to cheap asian labour.

Most people will realise this when they lose their jobs to three indian guys each costing a sixth of what they did, halving the companies wage burden in the process.

[music man]

3 - 3.5 salary.

[zorn]

I was wondering what this forum thought was a sensible income multiple for a mortgage. This is not as simple as it sounds as different multiples will be sensible for different people. So taking two typical FTB stereotypes, the young professional FTB with expected high salary growth, and your average FTB with moderate salary growth. So what do you reckon:

1. What is a sensible multiple for a professional young (20s, 30s) FTB with 10% pa average salary increase?

2. What is a sensible multiple for a young (20s, 30s) FTB with 3% pa average salary increase?

I wouldn't use income multiples at all -- they're too much of a blunt instrument. Look at what you can actually afford, based on your income and outgoings now, expected changes over the next few years, and your worst-case view on changes in interest rates over the life of the mortgage.

Depending on your circumstances, 3X salary might be too high, or 6X might be quite affordable.

[jaffa]

For me it is 4x my salary. Will be buying jointly, but certainly would not do a combined multiple due to biological timing of the other half!!!

[Red Baron]

I always worked on 2-2.5 times my own salary and ignored my wife's income for the calculation. We then used her income to pay down the capital quickly.

This was a very conservative approach, but allowed for voids in her income while bringing up children. And of course house prices were sensible back then.........

[undeservingrich]

Call me a reckless fool, but you all seem to be erring too far on the side of caution. 3.5 times salary was the old multiple from a time when borrowing was far more expensive. If you can fix at 5% for ten years you can afford to borrow more.

You're a reckless fool

[?...!]

I wouldn't use income multiples at all -- they're too much of a blunt instrument. Look at what you can actually afford, based on your income and outgoings now, expected changes over the next few years, and your worst-case view on changes in interest rates over the life of the mortgage.

Depending on your circumstances, 3X salary might be too high, or 6X might be quite affordable.

Wow...

I agree with zorn!

It ought to be disposable cash versus value borrowed.

Disposable cash incorporates pesion contributions, credit cards, bills, loans and anything else you might owe now or in the future.

I also allows you to continue to save.

It also makes this look like an even bigger uber inflated thing, a bubble would have burst by now, this looks much more violent. Oh dear.

I personnally feel you cannot borrow for more than 15 years, tops, there is just no way you can know what that time holds.

[Smell the Fear]

For me it is 4x my salary. Will be buying jointly, but certainly would not do a combined multiple due to biological timing of the other half!!!

Does Jaffa not mean infertile?

[DonnieDarker]

I'll be buying at 3.15 x joint income. (After putting down 25% deposit)

Edited January 26, 2006 by DonnieDarker

[FreeFall]

Does Jaffa not mean infertile?

Seedless to make such an observation...

[Tempest]

Call me a reckless fool, but you all seem to be erring too far on the side of caution. 3.5 times salary was the old multiple from a time when borrowing was far more expensive. If you can fix at 5% for ten years you can afford to borrow more.

Does that mean you should pay more for an asset? An asset's value should not be set purely by reference to the cost of funds required to purchase it. That is madness. There has to be some other intrinsic worth to it before you consider how you fund it (even if the "value" is based on historic trends/multiples etc). I agree funding costs do end up being a factor in the value of any asset but it should be weighted and not to the extent people forget the real value.

Even if you fix your rate for 10 years that is no guarantee of affordability for the remaining 15 years AND even if that were not a problem (or you fixed for 25 yrs) as long as others continued to buy houses on variable rates or with short term fixed rates the value of your asset in future will be dicated the then prevailing cost of funds and market sentiment!

eg If interest rates dropped to 0.25% someone could get a £1m repayment mortgage on "affordability" grounds at £3,500 a month (only 32k total interest burden!). Should one agree to pay £1m for a house that was once worth a fraction of that amount though? What is it really "worth"? If rates went to 5% or so from there the same monthly payment would only allow someone with the same cashflow to purchase a £600,000 property. What has happened to the "value" of the property?

To try to make this clearer: If I buy a house with a 100% mortgage for £500,000 and interest rates are fixed (for arguments sake) at 6.7% for the life of my 25 year loan I will repay £500,000 of capital and £531,000 of interest - total cost to me in terms of drain on my income over the period = £1,031,000.

If I buy an identical house next door with a 100% mortgage for £1000,000 at Japanese style interest rates of 0.25% I will repay £1,000,000 of capital and £31,000 of interest - total cost to me is the same £1,031,000.

The difference is in one case I have bought the asset for £500k and the other for £1m - ie 50% of that amount....EVEN THOUGH IT HAS COST ME THE SAME IN OUTGOING CASHFLOW TERMS.

There is no right and wrong I suppose only that things move up and down above and below the trend. History tells us that there is a ceiling (and a floor). Currently, cost of funds has too much weight in the pricing of property. This is what happened to commercial property in Japan in the mid 80s when rates were 2-3.5%...real estate asset values spiralled once the asset class became fashionable and low funding costs allowed it to do so. Even so, it only took rates to top 5% to pop that bubble.

[timmy_30]

Income multiple? Income multiple? What on earth are you concerned about that for!

Haven't you heard, as some other posters have suggested, the new measure is "affordability".

Now whereas income multiples were a restrictive ( well fact based ) view, i.e. x times income excl bonus. Which lets face it is boring and no fun, 'affordability' calculations mean that you can fool yourself, the bank and even your parents into thinking that you can prudently borrow far more than would otherwise be the case....

.... by underestimating future rises in costs such as taxes and energy bills, overestimating the rate at which you're combined salaries will increase ( and for exmaple conveniently forgetting that at some point you'll want to start a family ) and assuming that the economy will be one long recession free, low interest paradise you can get yourself right up the shitter far more easily than using something as daft as an income multiple.

So stop worrying about facts and start using you're imagination!

Tsssssk youth of today

[laurejon]

Income Multiples are irrlevent.

Its what you can afford, if you have 50k of personal debt due to Tuition Fees then you are in a different boat to someone who has no debts.

By the same token overstretching yourself has always been the gamble FTB'ers have had to take. For some if they bought in 1995 it has paid handsome dividends, for those that sat back they have lost out and missed the boat.

[Hairlocks]

I say our mind have definitly been changed.

My sister bought a house in 1995 for about 2.5 times her husband's (was boyfriend then) salary. Most people back then thought that was the maximum sensible amount, any more was silly even if you the bank would lend you it.

Now people seem to think 4x is sensible.

[CrashIsUnderWay]

here's why it was traditionally 3.5 ish.

out of your pay packet you...

give 1/3 to Gordenron Brown

spend 1/3 on those annoying little luxuries like food, electricity,underpants

leaving

1/3 for mortgage repayments (or rent payments, unless you live in one of TTRTR's ghettos, in which case you need to borrow 10x your annual salary to pay his weekly rent demands, and you are glad of the opportunity to live in the house of such a fine, upstanding albeit herring-scented landlord)

[DonnieDarker]

here's why it was traditionally 3.5 ish.

out of your pay packet you...

give 1/3 to Gordenron Brown

spend 1/3 on those annoying little luxuries like food, electricity,underpants

leaving

1/3 for mortgage repayments (or rent payments, unless you live in one of TTRTR's ghettos, in which case you need to borrow 10x your annual salary to pay his weekly rent demands, and you are glad of the opportunity to live in the house of such a fine, upstanding albeit herring-scented landlord)

1/3 on rent/mortgage....

Sounds about my situation.