Where to draw the line on mortgage debt when planning a life?

flashforward

Most first time buyers are couples in their early 30s with no children.
They get mortgages based on 3.5x combined salaries and spending/saving habits. With house prices rising more and more couples are borrowing the max 3.5 available.

This is fine for couples who plan to maintain their incomes. For couples who plan or end up have a family (1,2 or 3 kids) the cost of childcare can nullify 1 income and a parent can end up staying at home. Or this can be a choice the couple makes in advance.

What should the couple do in this case?
The bank will lend based on their current criteria.
The couple know within a number of years they will be in a much worse financial position.
Should they not accept the max 3.5x limit offered by the bank in this case? What rules could they use to determine affordability in these cases?

Cuddlesworth

No more then roughly 33% of the net income of the highest earner, unless you have some career in which pay rises are a given. At least that is what we are aiming for.

flashforward

Cuddlesworth wrote: »

No more then roughly 33% of the net income of the highest earner, unless you have some career in which pay rises are a given. At least that is what we are aiming for.

As in net income of €X for the top earner you are basing a mortgage repayment capacity of 1/3 the net amount?
Are you stressing the interest rate for a potential mortgage?

Alkers

Are you married so that you can avail of each others tax credits?

Moonbeam

When we were buying this house we decided on an amount that if for any reason one of us had to pay the mortgage that it was possible on the lower salary whilst still being able to live .
I think 25-35% of salary is enough to spend on a mortgage ,it is going to be a 30 year loan and circumstances change so it is better to me comfortable then over burdened .

myshirt

Moonbeam wrote: »

When we were buying this house we decided on an amount that if for any reason one of us had to pay the mortgage that it was possible on the lower salary whilst still being able to live .
I think 25-35% of salary is enough to spend on a mortgage ,it is going to be a 30 year loan and circumstances change so it is better to me comfortable then over burdened .

Good logic, but what will you get if you apply it to the market today?

flashforward

Simona1986 wrote: »

Are you married so that you can avail of each others tax credits?

I would plan on being married by the time a single income would be an issue.

What are the real world benefits of availing of the tax credits?

Alkers

flashforward wrote:

What are the real world benefits of availing of the tax credits?

Well it means you've double the tax free allowance and twice the amount of your income is taxed at the lower rate. Makes a massive difference if you're married and only one is working Vs both of you working if not married

Giblet

flashforward wrote: »

I would plan on being married by the time a single income would be an issue.

What are the real world benefits of availing of the tax credits?

If you claim all possible tax credits and allowances, it can add quite a bit to your salary. (Of course, you don't have a second salary.. but hey, no childcare either!)

average_runner

myshirt wrote: »

Good logic, but what will you get if you apply it to the market today?

The same issue was around in the boom.

My advice is buy something you can afford so when things go bad you be ok

myshirt

average_runner wrote: »

The same issue was around in the boom.

My advice is buy something you can afford so when things go bad you be ok

Absolutely agree, but what will you get for that prudence? There is not much, there may even be zero to nothing. What do you do then? Where are you supposed to live?

Cuddlesworth

flashforward wrote: »

As in net income of €X for the top earner you are basing a mortgage repayment capacity of 1/3 the net amount?
Are you stressing the interest rate for a potential mortgage?

For us yes, others might have to reassess their situation. There are too many factors like who earns what, who would stay home with the kids, what is their equity in the home, savings ability, money management skills etc.

tobsey

Simona1986 wrote: »

Well it means you've double the tax free allowance and twice the amount of your income is taxed at the lower rate. Makes a massive difference if you're married and only one is working Vs both of you working if not married

You're about 15 years out of date with that to be honest. A spouse can transfer a max of 1650 of their tax credits to their spouse. Als o they can only transfer about 9k towards increasing the cut-off. A one income married couple will pay the top rate after 42k, instead of 33k for individuals. If the one income is over 42k then that earns will take home about 300 a month extra than some taxed as an individual.

There is a home carers tax credit of 1k I think which can be claimed by stay at home parents so that adds another 80 or so to the net income.

mloc123

tobsey wrote: »

You're about 15 years out of date with that to be honest. A spouse can transfer a max of 1650 of their tax credits to their spouse. Als o they can only transfer about 9k towards increasing the cut-off. A one income married couple will pay the top rate after 42k, instead of 33k for individuals. If the one income is over 42k then that earns will take home about 300 a month extra than some taxed as an individual.

There is a home carers tax credit of 1k I think which can be claimed by stay at home parents so that adds another 80 or so to the net income.

Yup... 300ish a month, I know people that got married just to avail of tax credits... I had assumed it was worth substantially more than 300ish a month until I looked into it recently.

pwurple

Is that correct about the age? early 30's?

I would have assumed 20's for FTB generally.

Moonbeam

Moonbeam wrote: »

When we were buying this house we decided on an amount that if for any reason one of us had to pay the mortgage that it was possible on the lower salary whilst still being able to live .
I think 25-35% of salary is enough to spend on a mortgage ,it is going to be a 30 year loan and circumstances change so it is better to me comfortable then over burdened .

Even outside the major cities you will struggle to get much of a house for 25% of one net salary per month unless it's a very high salary.

Michael D Not Higgins

pwurple wrote: »

Is that correct about the age? early 30's?

I would have assumed 20's for FTB generally.

From the Central Bank's report late last year http://www.boards.ie/vbulletin/showthread.php?p=101595065

FTB average 34 years old
SSB average 41 years old

Cuddlesworth

pwurple wrote: »

Is that correct about the age? early 30's?

I would have assumed 20's for FTB generally.

In a city like Dublin/Galway/Cork? Doubtful, house prices are multiples of the average single earner.

mloc123

pwurple wrote: »

Is that correct about the age? early 30's?

I would have assumed 20's for FTB generally.

Figures must be skewed also by people waiting for the last 8 years to buy (get a mortgage)..

myshirt

The age issue is one that is going to get worse. We have a whole pipeline of young people who were unemployed or underemployed during their early to mid 20's that we need to get through. It's a big effect on the economy and on these kids lives to have been unemployed during their formative years. We will get through them though.

When we get that pipeline flowing better again, we will have to put the next batch out to roost to fund the growing pot of retiriees. There will have to be less home ownership and more renting (from asset rich baby boomers/early gen'x'ers).

OscarBluth

We were in that position (early 30s, planing to start a family) when we bought and tried to calculate future costs in the case of childcare rather than just relying on what the bank told us.

We also agreed to save the cost of childcare every month for a while to see if it was definitely manageable.

The thing is, it's only five years you have full-time childcare costs. Many people get help from grandparents or family, some parts of the country have much cheaper childcare. Many people are currently going out every weekend spending hundreds and know that when the time comes they'll be able to cut that back. Over a 30 year mortgage five years is not such a long time to be feeling a bit stretched, once it doesn't go beyond that - for us, mortgage repayments on a small 3-bed equalled the rent we were paying on a 1-bed so it also didn't really seem like there was much of an alternative.

myshirt

myshirt wrote: »

Good logic, but what will you get if you apply it to the market today?

That's the thing, the market today is drastically different to the market of 5 years ago but mortgage terms are multiples of that 5 years.

If you apply good logic to the market of today and the figures don't work than maybe it's not a good time to buy.

The problem with home purchases are that you are committing to 30 odd years of mortgage based on the current house price, house prices in Ireland are quite volatile as most of us appreciate.

f@steddie

flashforward wrote: »

Most first time buyers are couples in their early 30s with no children.
They get mortgages based on 3.5x combined salaries and spending/saving habits. With house prices rising more and more couples are borrowing the max 3.5 available.

This is fine for couples who plan to maintain their incomes. For couples who plan or end up have a family (1,2 or 3 kids) the cost of childcare can nullify 1 income and a parent can end up staying at home. Or this can be a choice the couple makes in advance.

What should the couple do in this case?
The bank will lend based on their current criteria.
The couple know within a number of years they will be in a much worse financial position.
Should they not accept the max 3.5x limit offered by the bank in this case? What rules could they use to determine affordability in these cases?

What the couple should do (in my opinion) is to maximise their deposit and savings. Drop the second car, eating out and foreign holidays for a few years to ensure they have a large deposit and an emergency fund (that will not be spent on the house). A mortgage should be as small as possible, not as large as possible.

Most working couples in their early 30s can afford pretty much anything (within reason). They can't, however, afford everything.

flashforward

f@steddie wrote: »

What the couple should do (in my opinion) is to maximise their deposit and savings. Drop the second car, eating out and foreign holidays for a few years to ensure they have a large deposit and an emergency fund (that will not be spent on the house). A mortgage should be as small as possible, not as large as possible.

Most working couples in their early 30s can afford pretty much anything (within reason). They can't, however, afford everything.

Problem here is a catch 22 when trying to maximise the deposit. With house prices increasing >10% per year even maximising your savings will not even account for thes price increase in the year...

flashforward

flashforward wrote: »

Problem here is a catch 22 when trying to maximise the deposit. With house prices increasing >10% per year even maximising your savings will not even account for thes price increase in the year...

You are looking at a tiny sample size.
Look from 2002 to 2017 and the year on year fluctuation in house prices. They won't keep on going up >10%/year for too long relative to the length of a 30 year mortgage.

mloc123

Augeo wrote: »

You are looking at a tiny sample size.
Look from 2002 to 2017 and the year on year fluctuation in house prices. They won't keep on going up >10%/year for too long relative to the length of a 30 year mortgage.

But what about the couple in their early 30s now... do they hold out another 10 years and keep saving (while paying rent) in the hope that prices level out or even drop?

So lets say prices remain fixed now until they buy. What is the advantage of having a larger deposit versus getting a larger mortgage now? They will pay more interest for sure, but offset that against rent at say 1500/month (18,000/year). They could invest their savings but in reality will put it in a 21 day notice account with little or no return.

mloc123

mloc123 wrote: »

But what about the couple in their early 30s now... do they hold out another 10 years and keep saving (while paying rent) in the hope that prices level out or even drop?

So lets say prices remain fixed now until they buy. What is the advantage of having a larger deposit versus getting a larger mortgage now? They will pay more interest for sure, but offset that against rent at say 1500/month (18,000/year). They could invest their savings but in reality will put it in a 21 day notice account with little or no return.

Well if they bought 2 years ago they'd be much better off.
IMO they've missed the value boat. Similar to how folk who bought in 2006 and 2007 defo missed the value boat but bought whatever they could to get on the ladder, that hasn't worked out too well for them has it in most cases. Still in negative equity largely or just out of it after a decade of mortgage payments.

No one has a crystal ball but the point made was "What the couple should do (in my opinion) is to maximise their deposit and savings. Drop the second car, eating out and foreign holidays for a few years to ensure they have a large deposit and an emergency fund (that will not be spent on the house). A mortgage should be as small as possible, not as large as possible.

Most working couples in their early 30s can afford pretty much anything (within reason). They can't, however, afford everything."

To achieve that you don't just start the necessary behaviour in your early 30s.

You pay for your property pver 20 or 30 years, the price is volatile and you are locked into the price at day 1. Folks don't appreciate that largely.