Saving over 2k/m, what to limit mortgage to?

Discussion in 'Money makeover' started by HowMuchToBorrow, Mar 11, 2018.

  1. HowMuchToBorrow

    HowMuchToBorrow Registered User

    Age: 30
    Spouse’s/Partner's age: N/A

    Annual gross income from employment or profession:
    110,000 (though 15% of that would be split between bonus and vested stocks - the latter of which can vary...Ignoring stocks, let's say only 100,000 would count towards regular income for mortgage borrowing)

    Annual gross income of spouse: N/A

    Monthly take-home pay
    After pension contributions and AVCs, about 4,200/month. (Excludes annual bonus, vested stocks etc.)

    Type of employment: private sector (IT)

    In general are you:
    (a) spending more than you earn, or
    (b) saving?
    Saving 2,000/month on a regular basis. I try to add the money from the ongoing sold vested stocks together with a portion of the bonus into savings as well to target 30,000/year savings (on track).

    Regular spend is:
    • about 1,000/month rent (equivalent accommodation if I were to move would be around 1,500/month currently)
    • 1,200/month for all of the other regular living expenses (no car).
    This feels tight at times, given my overall income level - and it works out that I could sustain this on a salary of not much over 30,000/year (ignoring pension contributions, savings etc).
    I do use a part of the bonus as a holiday/gadgets/fun account - though generally I would probably redirect a majority of it into savings.

    Rough estimate of value of home: N/A
    Amount outstanding on your mortgage: N/A
    What interest rate are you paying? N/A
    Other borrowings – car loans/personal loans etc: None

    Do you pay off your full credit card balance each month? N/A
    If not, what is the balance on your credit card? N/A

    Savings and investments
    Savings account: 76,000
    Investment account (stocks, not related to my employer): 34,000

    Do you have a pension scheme?
    Yes, pension fund is: 78,000 (100% in a global equities fund)
    I'm maxing out my contribution to get the max employer's matching and I contribute an extra 300/month in AVCs; currently adding close to 15,000/year to the pension fund.

    Do you own any investment or other property?

    Ages of children: N/A

    Life insurance
    I have (some?) life insurance through work (as well as health insurance).

    What specific question do you have or what issues are of concern to you?
    I'm currently conflicted as to what would be a responsible amount to borrow for a mortgage to buy a property to live in, given my financial situation.

    I'm decided on getting a property to increase my comfort level and get away from the ***** rental market with little security of tenure, Bargaintown furniture, appliances and fixtures and tiny apartments/flats with bad noise or heating insulation. (Not to mention the high rental prices..)

    While initially I was considering the starter apartment route, given my increasing income levels over the past couple of years and banks willingness to grant me a LTI exception, I'm considering getting a "forever home" now, which for me would be a 3-bed house (the type doesn't matter much) in a decent area of Dublin, preferably not incredibly far out in the burbs.

    The two banks I've been talking both seem willing to grant me an LTI exception to borrow more than the usual 3.5x times salary and it looks like I should be able to borrow between 400,000 (max for bank 1) and 450,000 (max for bank 2 - though I haven't yet finished the application process with them and gotten approval from the underwriters) if I desire to do so.
    I have read the horror stories about the 100-110% mortgages from the boom times though and I'm keeping them in mind.

    I'm somewhat tempted to take advantage of that so as to not fall in the potential "starter home" trap as I don't know how the economy and housing market is going to evolve.

    400,000 borrowed over 35 years is around 1550/month at current rates (~3%) and about 2300/month if I stress test to 6% rates.

    Even if I lose my current job (to note: I have a stable position), I don't think I'll have any issues finding a job that pays 70,000/year which translates to 3900/month (but realistically I should be able to get something within 80% of my current pay or more).

    Thus, If I lose my job and get hired at 64% of my current salary and interest rates also increase by 3% at the same time - given my current spend - I should still be able to afford it, as that leaves me with a spending budget of 1,600/month (from which I'd also need to sort out pension contributions, savings etc.). I could also rent out a room in that scenario for a bit of extra cash if it's bad..
    That's certainly not the worst case scenario that I can think of, if rates go like they did in the late 80's/early 90's then I'm goosed - but I guess everyone else is as well if that happens..

    AAM - given the above, what would responsible borrowing mean in my case?

    To some extent, I'm keen to buy a property, move in and start spending a bit more to live a little more and somewhat reduce my savings rate - though I don't feel too comfortable reducing my savings rate while renting while wanting to buy and seeing house prices increase 10% yoy and feeling them slip out of my reach more and more.

    Another side-question would be: if I do get a mortgage, should I eliminate AVCs and redirect that money to mortgage over payments until I've dropped LTV significantly (say under 70% - as I've seen advised on another thread)?
  2. Sarenco

    Sarenco Frequent Poster

    Personally, I think the Central Bank's general limits (3.5 LTI/80% LTV) are a pretty good guide as to what constitutes a prudent maximum mortgage amount.

    On your side question, I take the view that, in most circumstances, it makes more sense to prioritise maximising pension contributions over paying down a mortgage ahead of schedule.
    RedOnion and RETIRED2017 like this.
  3. HowMuchToBorrow

    HowMuchToBorrow Registered User

    Thank you for your answer Sarenco!

    I was thinking the same in that they do constitute a solid guideline/max amount, however, the Central Bank also explicitly allows a certain amount of exceptions to the 3.5 LTI/90% LTV rule for FTBs.

    As income goes up, discretionary income as a percentage of salary also goes up (unless there's a lot of lifestyle inflation) which would give some credence to the idea that sometimes exceptions are justified. Or am I just rationalizing this?

    Curious what other's views on this are as well.
  4. RedOnion

    RedOnion Frequent Poster

    You've got great advice from @Sarenco above. Between 3 and 3.5 times income has always been seen as a prudent max.

    You're young Don't tie yourself down with debt that you'll spend the rest of your life repaying, or that will limit your options when you really start living!
  5. gnf_ireland

    gnf_ireland Frequent Poster

    Yes, but this is better used in scenarios where the earnings are expected to grow considerably over time. Think a junior doctor or registrar who would clearly anticipate their income to grew within a few years. Or a couple who one party has gone part time to mind kids, but is expecting to return to work full time once the kids are in school. The guidelines are there for a reason !

    You are just rationalizing it - but the exceptions should be used as an exception. Where do you feel you warrant an exception? You already make 110k - what do you realistically see this wage to be in 5 years time? How exposed are you to MNC's (i.e are you IT based) and what is the exposure if any to Brexit?
    If you were to get another job in the morning, do you genuinely think you could command the same salary as you are on now?

    Personally, I would not go above the 3.5 guideline unless I was very confident my income was going to increase further.

    Absolutely agree - how many people now view the properties they bought in the boom times as a noose around their necks !

    I am not sure I agree 100% with this, but we can agree to disagree :) I think once the mortgage is very manageable - less than 50%LTV + <2times LTI, then pension contributions should be prioritised further. I am not saying make no contributions, but I would make reasonable contributions (say up to 7.5%-10%), and use any excess to reduce the debt on the mortgage until it gets below say 50% LTV and say 1.75-2 times LTI. After that, and depending on personal circumstances, you can evaluate again.

    In the event someone has received an exemption on the 3.5 times LTI central bank rule, I would definitely be recommending reducing the mortgage debt over pension contributions until it falls below at least 3 times LTI. Otherwise the person is carrying excessive risk on the mortgage in my personal view.
  6. HowMuchToBorrow

    HowMuchToBorrow Registered User

    Thank you for your answers RedOnion and gnf_ireland.

    I am working off the conservative assumption that my salary will not go up / will only track inflation.

    I am exposed to MNCs (IT based), but not to Brexit at all as far as I can tell.

    I'm not sure of that, hence the stress test that I performed in my initial post assuming I would get a job in the morning at 64% of my current salary. I am confident I should be able to get at least 80% of my current salary though.

    And that's exactly my main concern here. Any specific thoughts on the stress test I was trying to mock up in my initial post with the 35% salary decrease + the 3% rate increase?

    What I'm thinking currently is that between my savings and investments I have 110,000 available to me.
    If I were to go sale agreed on a property now and close in two months time (which would be really quick), my savings would more likely be around 114,000 by then. Assuming 7,000 for the legal costs and 7,000 for a rainy day/emergency fund, that would leave me with 100,000 as a deposit. 7,000 for a rainy day fund is quite low, but a 2% cashback from the bank would increase that to 14,000 in another two months times - which I'd imagine is plenty - given my spend and career prospects.

    [1] Do not avail of exceptions and liquidate savings and investments
    Assuming 3.5x LTI (=> 350,000 mortgage) and a 100,000 deposit that would mean I could buy a property for 450,000. That would however mean liquidating my entire stock portofolio, which, for some unexplained psychological reason, I'd be keen to avoid. (Would I borrow 35,000 at 3% to invest in the stock market? No - I am fully aware that this position is irrational...).

    [2] Use LTI exception to not have to liquidate all of the savings and investments
    However, I have the option to buy the same property, at 450,000, with a 50,000 deposit and a 4x LTI mortgage (400,000). That would leave me with all of my stocks intact and a sizable emergency fund available day 1 (to which the 2% cashback is added later).

    Assuming I do not exceed the 450,000 limit for the house - is the risk profile much different between the two options?
    To me, scenario [2] sounds a lot safer, as I maintain a much larger buffer of savings that I can also use to get through say a longer period of unemployment (unlikely) or drop the LTI/LTV in the event of a rate increase. A stock market crash would certainly be a factor in this though.

    An additional question: other than the mortgage/borrowing question above, how am I doing overall in terms of financial management?
    Am I prioritizing pension/savings correctly? Anything about the savings rate I'm at currently?
    Is there any money strategy I should take into account?
    To note: I have not invested into stocks in quite some time, as I'm saving for the house purchase - which is on a much shorter time horizon in terms of when I'd need the liquidity.

    Thank you all for your answers thus far!
  7. gnf_ireland

    gnf_ireland Frequent Poster

    From what I can gather, your role is specialised and maybe not easily transferable. I also work in IT, although not with an MNC, and know how sensitive salaries can be to a lot of factors. People in their early 30's normally believe their salary can only go up - having been through it, I can assure they can go in both directions.
    Let say you avail of an exemption and go for a mortgage of 400k (4 times LTI), and you end up moving jobs for whatever reason and end up on 80k (your confidence estimate), your mortgage has now 5 times LTI. I personally think this is too high. You can only afford that by cutting back elsewhere in your life and potentially living a very frugal existence. Where is the fun in that?
    What about if you meet someone who likes to live a little (more than you do)? What about if you have kids and your partner wants to take time off to be with the kids? This will eat into your salary also, and potentially put pressure on the current spending patterns.

    Remember you have a house to furnish, stamp duty to pay, insurance to buy etc etc etc.
    And don't bank on the career prospects - life can kick you when you least expect it. Of course be career minded, but someone in IT should not assume that the future is all rosey in the garden. Ireland will face challenges in this area in the near future.
    100k is a decent IT salary. Going above that normally means moving up the ladder (normally a lot more political and more prone to downsizing measures) or going contracting (which in itself adds risk into the equation).

    Yes - in the second option you are exposed to market risk as well as property price risk. This can go up was well as down. Also depends on what your stocks are invested in and general market conditions. You may be 'insuring' yourself against something (unemployment) which you don't believe will happen...

    This is exactly what you are proposing to do, you are borrowing 35k @3% to invest in the stock market.

    Sort out the house purchase and then come back to review after that. There is little point in discussing anything about financial management when you are focused on purchasing a house.

    My advise - try not to overextend yourself, and if you do focus on getting the debt down to reasonable levels as quickly as you can.
  8. Purple

    Purple Frequent Poster

    Debt limits choices; it has to be serviced no matter what else happens to you.

    You are saving 30,000 a year which is great but to be blunt €450,000 isn't going to get you much of a "forever home" in a nice suburb of Dublin, not too far from the city center.

    Why not look at a longer term investment strategy and keep renting. There's more than one way to accumulate assets. The "renting is dead money" mantra is nonsense. If you borrow €450,000 over 35 you'll pay around €8000 a year in interest, not to mention upkeep, mortgage protection insurance etc.
  9. Firefly

    Firefly Frequent Poster

    Also, even if you did find your "forever home" I note that you are not married. If and when you do get married, anything you do buy now may well not meet the criteria of a "forever home".

    I would be inclined to sit still and keep saving the loot.
  10. Purple

    Purple Frequent Poster

    And live a little more; you'll be a long time dead.
    Firefly likes this.
  11. Sarenco

    Sarenco Frequent Poster

    Agree with @Firefly that the idea of a "forever home" is probably something of an illusion.

    If you can comfortably afford to buy a home that you think will meet your needs for the next seven years or so, then fire ahead. Otherwise, just keep renting and saving.

    It's never a good idea to over leverage your future income - 3.5 LTI should be seen as a ceiling, not a target IMO.
  12. Gordon Gekko

    Gordon Gekko Frequent Poster

    However, there is scope for nuance in certain cases, hence the exemptions. I agree with Sarenco that pension contributions should be prioritised over mortgage overpayments. I would disagree with the point made around rent being dead money. It’s not “dead money” in the truest sense in that you’re paying for a good/service (i.e. accommodation); however, I’m strongly of the view that buying is preferable. I’ve a choice, pay X a year for 30 years and be left with an asset, or pay more than X a year for 30 years only to be left with nothing!
  13. gnf_ireland

    gnf_ireland Frequent Poster

    Completely agree with this statement. Anything above that, no matter what the LTV is risky unless you are very confident your salary will continue to grow - the best example being a doctor
  14. HowMuchToBorrow

    HowMuchToBorrow Registered User

    Thank you gnf for your thoughts on this, I feel your message did shine a light upon some of my, perhaps youth-induced, blind spots, I really appreciate sharing your life experience in this case.

    As a side note, fortunately, I'm not in a specialized role and I have quite transferable and in-demand skills as a software engineer with cloud experience. Though.. that's not a reason to borrow irresponsibly.

    I feel that's exactly what I'm doing now though giving my savings rate, in order not to endanger the prospect of having my finances well lined-up for a future house purchase. Where's the fun in that indeed.. :)

    In this thread, you'll see that nobody made the point that "rent is dead money" in any shape or form and I'm certainly happy to be of the same opinion as the two of you!

    I am well aware of the interest costs, mortgage protection, life insurance, property tax (that I expect to increase in the future much more), furniture and appliances replacement, property maintenance, upkeep, buying & selling costs etc. that comes with getting and owning a property.

    That is not at all lost on me and I've modeled these costs financially in a variety of ways. Given two identical properties in the same estate, one mortgaged out, one rented (based on recent daft and ppr figures), the net costs for buying (the ones mentioned above) seem to be slighty lower or in the same ballpark as renting over a very long period of time, even assuming:
    • a reversion to the historical mean for interest rates (5%) [unfavorable assumption for buying as it's 2% higher than current rates],
    • low (below long term inflation rates) annual house price increases (1%) [unfavorable assumption for buying as it significantly reduces the capital gains that would occur from the leveraged position],
    • low annual rent increases (1%) [unfavorable assumption for buying again] and
    • a decent net investment ROI (5%) [assuming the long term US stocks ROI rate of 7% is with us again... and of course gets taxed by the government by about a third].

    These could be very unreasonable assumptions though and we could see hyper-inflation like we saw before, or a three decade house price decrease like Japan had.. or... (fill in other scenarios here).

    In other terms, depending on the area of Dublin and the type of property under analysis, the premium for owning vs. renting seems to be quite low or negative (would that be unusual historically?).
    YMMV, depending on what estates and types of properties you pick. The rental yields seem to be higher at the lower end (1,2 bed apartments) and much lower for the higher end (4,5 bed houses in leafy suburbs).

    Assuming net costs in both cases (mortgage vs. renting) are not extremely far off each other as observed above (for the properties and areas I'm interested in), the addition of capital repayments into the equation is where one's cash flow takes a big hit (i.e.: your total outgoings for accommodation in a mortgage scenario could be double that of the rental scenario - but the net costs would be the same).
    But then again, I'd see that as forced savings [building capital in a very illiquid asset] for lack of a better word and I certainly wouldn't expect to save as much as I do today in a mortgage scenario.

    I find Ronan Lyon's buy or rent calculator to be quite useful for conversations like these (can't add links to it yet, but I'm sure you know it). While unlike the NYT's mortgage calculator you can't input other costs (such as the ones previously mentioned), you can crudely represent the other costs as "discounts" to the monthly rent field.

    The strong overall consensus here seems to be: do not exceed an LTI ratio of 3.5! (Early career doctors, registrars etc. excluded)

    Is a 3.40 LTI great while a 3.60 LTI represents a disastrous financial decision?
    As with all things, I believe there's a scale that needs to be applied here as well, but I have to say, I found the following to be really good advice:
  15. gnf_ireland

    gnf_ireland Frequent Poster

    IT is always changing. The skill set that is in demand today may fall out of favour in 5 years time. If a skill becomes very in demand, there is a premium for the service for a few years and then more and more people train up on it until the premium is reduced. The key is to keep up to date with what is going on and be able to keep one step ahead of the game. Sadly, this is easier said than done and I am in the position myself now where I need to decide what route I want to take over the remainder of my working life. I realistically cannot stay doing what I am doing, as I can foresee the future is not as rosey as the past has been !!! The good thing is I can see I need to adapt now before it is too late

    In software engineering there is a ceiling that eventually gets hit. I am not sure what that ceiling is in your area, but unless you are willing to go into management (totally different role) or architecture (very different role), you do reach a plateau. Good engineers don't always make good managers or architects - so do keep that in mind. You have probably 30 years work left in you - lots will change in that window !

    It is a balance and you need to be careful of that. Having a house and a large mortgage, while important to lots, is not all its cracked up to be and you are young - you need to live your life and have fun as well. All work and no play ...

    A large section of the post is about the 'mathematical' aspects of buying a property. There is another side to it - the human side of buying a home; a place to come home to in the evenings that is yours and you can change within reason. Obviously your housing needs can change over time, but there is a level of security about owning your own place. Do know where you would like to live and what kind of place you would like to buy? The location is very important to me, and needs to be somewhere that you are happy to live in and will enjoy doing what you do in your free time.

    Obviously, there are scales but as a general principle I would say try stay within the recommendations if possible.

    Finally, I am wondering given your in-demand IT skills, have you considered a stint working abroad as a contractor where you could potentially command a relatively strong premium for your services in the short term and is likely to facilitate a period of very strong savings. I done this in my late 20's, had a ball and it did 'set me up' for a fair few years