I can borrow HOW MUCH??

Maybe it’s time to get on the housing ladder…I mean, everyone in the UK is doing it.  From the latest inflation figures, interest rates may not be on the rise for a long time; why not go for a big variable-rate mortgage??

I’m being a bit sarcastic here, but something compelled me to look at mortgage rates in the UK over the weekend.  Aside from the bad feeling I get from a variable-rate mortgage as a concept (aside for Americans: it’s incredible the amount US taxpayers subsidise home ownership, between Fannie/Freddie and tax-deductibility of mortgage interest), I wanted to see how much a regular schlub could borrow.  Using one of those fancy calculators one of the major high-street banks offer on their website, I put in something like:

  • Borrowers – 1
  • Salary for borrower – £35,000 p.a. (around the national average)
  • Other liabilities – £0
  • Result: I can borrow £168,000 

So around 5x gross income?? At average UK rates (keep in mind – no tax-deduction for interest here), that’s £850/month for a standard mortgage.  Assuming standard UK tax rates, after-tax income for this would be around £2,500/month; therefore the mortgage is around 1/3 of income.

I guess that’s alright, when rates are low.  About 4% for this scenario, which is about 3.5% above UK base rate.  Suppose the margin (3.5%) stays the same over time, with all the variability in the base rate.  The latter has been around 5% for an awful long time – so a ‘normal’ mortgage rate would be around 8%.  My mortgage payment would then be around £1,300/month, or just more than 1/2 of income.

Again, this signals 2 things for me:

  1. Americans are soooo lucky: fixed interest mortgages are a god-send, particularly for less financially-savvy consumers.  I’d much rather know that I’m paying 4-5% p.a. for 30 years than have the situation outlined above.
  2. I think I’ll hold off getting on the housing ladder: yes, house prices keep rising in the UK.  How can people afford it?  Rolling equity from their previous houses (the ‘ladder’ bit), and paying low interest (which, incidentally, helps build equity through raising house prices).  I think I’ll wait until interest rates rise towards equilibrium, then see who can no longer afford their mortgage payments.  When will that be?  Who knows.  Thankfully rental yields seem to be about the same as interest rates on a mortgage, so I’m not out too much.

End soapbox.

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