Opinions on Mortgage Affordability

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Paul1977

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#262028 31-Dec-2019 12:01

What is a good guideline for when a mortgage is just too big?

Bank calculators (and what the bank is willing to lend) is often more than can be comfortably paid back. And I see a lot of differing advice from other sources, ranging from as low as 25% of net pay to as high as 40% of gross pay, for the repayments to be considered affordable.

What are people thoughts on what is affordable for mortgage repayments?

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#2383260 31-Dec-2019 12:20

Would it be a good idea to dig out what the interest rates have been over the last 10 years and check whether the highest rate can be afforded ?

“The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.” -John Kenneth Galbraith

rb99

alasta

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#2383261 31-Dec-2019 12:30

The answer to this question varies enormously depending on your personal situation, such as how many kids you have, whether you have existing debt to service, whether you own a vehicle, etc.

I have built a financial model which is currently showing that I can borrow 3.8 times my after tax income (or 2.8 times my before tax income) if I assume that mortgage interest rates rise to 8% over the next 3 - 5 years. Admittedly that is a very conservative assumption that I made prior to recent interest rate decreases but, on the other side of the coin, my general expenses are reasonably low relative to my income.

Talking to a financial advisor would be a very good investment. They will be able to look at your budget, and do some stress testing based on different scenarios.

Deamo

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#2383263 31-Dec-2019 12:31

I'm currently paying 35% of net income, and I consider that too high. 20-25% would be confortable for me, as that would allow room to move when interest rates begin to climb again.

alasta

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#2383264 31-Dec-2019 12:32

rb99:

Would it be a good idea to dig out what the interest rates have been over the last 10 years and check whether the highest rate can be afforded ?

If I recall correctly floating rates peaked at around 11% prior to the GFC. The long term trend has been downwards for at least the last 30 years so I don't think we'll see rates that high again, but anything is possible.

Paul1977

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#2383268 31-Dec-2019 12:42

rb99:

Would it be a good idea to dig out what the interest rates have been over the last 10 years and check whether the highest rate can be afforded ?

I'm comfortable with our upcoming new mortgage, as we have factored in the possibility of interest rate increases. I'm more just wondering what others consider affordable.

driller2000

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#2383274 31-Dec-2019 12:57

It depends on your specific circumstances - in particular income and outgoings.

You need to look at your income and whether that will go up or down.
You need to do a detailed and realistic budget outlining all outgoings/expenses - incl costs of living, debt repayments and expected significant outgoings - holidays/cars/kids/renovations etc.
You then need to run a few stress tests/scenarios e.g. interest rates go up, you lose your job, you go from 2 to 1 income, you have more kids etc etc.
And from all of this work out if you have a sufficient buffer of income (+ savings) vs outgoings.

All this said - most people wont do the above sufficiently well enough - so I would also recommend getting independent advice.

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#2383275 31-Dec-2019 12:57

One thing is sure....mortgage rates will rise to at least 10% sooner or later. Doesnt take too much to set them off from a global perspective.

michaelmurfy

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#2383282 31-Dec-2019 12:59

When I got my mortgage the bank did their affordability calculations with 7.9% - my mortgage isn’t even close to that but they had to be sure.

When you see a personal banker you’ll soon realise affordability is in their best interest. They don’t want a mortgagee sale as banks lose a tonne of money from this.

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Paul1977

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#2383289 31-Dec-2019 13:18

michaelmurfy: When I got my mortgage the bank did their affordability calculations with 7.9% - my mortgage isn’t even close to that but they had to be sure.

When you see a personal banker you’ll soon realise affordability is in their best interest. They don’t want a mortgagee sale as banks lose a tonne of money from this.

I don't know what rate they used when calculating for us, but we were pre-approved for about $250,000 more than we will need to borrow. However, if we did borrow the full amount we were pre-approved for it would be very tight even at the current low rates.

It just seemed, for us anyway, that the bank would be happy for us to borrow more than we felt comfortable with.

eracode

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#2383303 31-Dec-2019 14:05

At the time I ceased being involved in banking six years ago, banks typically assessed debt servicing ability using the method set out below. It may have changed over that period.

calculate the monthly principal and interest payment required to fully repay the proposed loan amount over 25 or 30 years.
even though current market rates for home loans are, say, 4%, for this calculation they use a higher rate (their ‘Applied Interest Rate’) to allow for higher rates in the future. I used to know what these rates were but no longer - my guess is that they would currently use an AIR of about 6-7%.
the monthly P&I payment is multiplied by 12 months and compared to the gross household annual income (salary or wages plus an allowance for any rental or other regular income) to get a percentage. i.e. servicing cost/income %.
the resulting percentage is then compared to a test matrix of debt servicing percentages which takes into account number of dependants, absolute $ level of income (they assume higher income earners can afford to spend a higher proportion of their income on debt servicing) and so on.
the matrix values could be anywhere between 25 and 40% (as mentioned above) depending on the borrower’s circumstances - and if a borrower’s % is above the % indicated by the matrix for their circs, the loan is likely to be declined.

Although the home loan lending market is very competitive, the banks are very conservative and careful about how much they lend and who they lend it to. A major factor is that if they are found to have lent more than a borrower can reasonably afford, even later with higher rates, then they are in serious trouble with the Financial Markets Authority.

These days a bank would be very foolish to lend someone more than they can afford.

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#2383312 31-Dec-2019 14:22

I know someone trying to get a mortgage in Australia, and they are haven't great difficulty because the banks there there have really tightened up lending in the wake of the various things going on over there. NZ banks are mainly owned by these Oz banks, so I wouldn't be surprised to see thing tighten up here this year. The thing about lending, is that banks have to make money from that lending. So if they aren't able to lend as much money out as they have been, then they may put up rates to compensate. I would be worried about the actual amount being borrowed, as much as the interest rates. Houses in NZ are now some of the most expensive and least affordable in the world. It is madness what some people are paying, but that is also due to a lack of supply and a huge flow of people moving to NZ which hasn't really slowed down despite the change in government. Affordability hasn't changed that much because interest rates have dropped, allowing house prices to rise, as many people seem to l borrow up to their limits to get onto the housing ladder. But if interest rates rise, then house prices potentially could drop, as the reverse situation then occurs. I would be worried about my house being worth less that I paid, or worse, less than the amount borrowed. I do wonder when the bubble will burst. But you should get some expert financial advice.

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#2383447 31-Dec-2019 16:59

I remember Winston Peters not so long ago saying that a house price should be 2-3 times your income, not 10 times, like it is in some places. I've always felt this would make mortgages more affordable for a lot more people.

eracode

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#2383458 31-Dec-2019 17:11

quickymart:

I remember Winston Peters not so long ago saying that a house price should be 2-3 times your income, not 10 times, like it is in some places. I've always felt this would make mortgages more affordable for a lot more people.

Winston has said a lot things. Like he would personally lead the walk-in to Pike River mine.

How do you think you we might reach this nirvana of house prices not more than 2-3 times income?

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quickymart

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#2383484 31-Dec-2019 18:15

It was like that for a long time though, wasn't it? No one died and people still bought and sold houses - they could just afford them much more easily. A friend of mine said to me once upon a time in Auckland (the early-to-mid 2000's) it was cheaper to buy than rent. Today it's totally the other extreme, and then some.

While I personally don't like Winston (I find him quite polarising) on this one I feel he is onto something.

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#2383532 31-Dec-2019 22:09

quickymart:

It was like that for a long time though, wasn't it? No one died and people still bought and sold houses - they could just afford them much more easily. A friend of mine said to me once upon a time in Auckland (the early-to-mid 2000's) it was cheaper to buy than rent. Today it's totally the other extreme, and then some.

While I personally don't like Winston (I find him quite polarising) on this one I feel he is onto something.

Yes it’s an admirable aspiration - but you haven’t answered my question: How do you and Winston think we could get to that situation?

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