Interest rates are irrelevant when you can only borrow 4.5x income but home prices are at 8-9x
Interest rates are irrelevant when you need 20% down and it will take you a decade to save that up while renting, because of said multiple.
Interest rates are irrelevant when you need 20% down and it will take you a decade to save that up while renting, because of said multiple.
This is such a weird home buying myth and I don't understand how it sticks around.
...and less than 1% of recent mortgage completions are with 5% deposits (the minimum here)[0]
There is one big reason deposit size matters: affordability and risk. PMI doesn't exist in the UK, it's built in to the rate. When you're stretching what you're borrowing to the maximum (thanks to these high price/income multiples) every 1% on a mortgage can be the difference between relative comfort, and being 'House Poor' and living with constant anxiety about rates rising before you can refinance.
At the moment with 10% down:
- 25 year fix: 4.64%
- 5 year fix: 2.50%
- 2 year fix: 2.10%
With 20% down:
- 25 year fix: 3.80%
- 5 year fix: 1.70%
- 2 year fix: 1.40%
The other thing, that some other commenters have mentioned is that most lenders won't lend at high LTVs on high value properties, or on certain property types, like flats (minimum deposits of 20% on flats are common, which is particularly problematic given that they tend to be the most affordable properties).
[0] https://www.financialreporter.co.uk/mortgages/95-ltv-mortgag...
You end up paying more in the long run when you add on PMI. I think they are internally conflating "should be avoided" with "can't." I do that with personal things all the time when I tell myself I can't do something that I shouldn't, but actually can do.
Putting down 20% doesn't make sense in my case, since home prices continuing to increase and me adding home improvements that increase the value of my home I will be able to refinance my loan in a little over 2 years to get rid of the PMI, and still have spent way less than the 20% down would have cost me.
I waited in order to save the traditional 20% down payment, and, in hindsight, that was a dumb financial move. Investment returns would have outpaced what I was paying in PMI by 10x each year, and the place appreciated enough in two years that I could have refinanced with no PMI without putting any additional money in.
Other major metropolitan areas do OK, though. I put 5% down on my first house just outside of Boston and 10% at my current home (voluntarily, my mortgage broker asked for 6.5%).
- PMI is really not as expensive as you might think. I pay ~$150/mo extra and all told my mortgage is just over $2k/mo
- PMI rate depends on a LOT of factors, including your lender's terms, your own credit history, and even the amount you put down. Your PMI gets re-evaluated yearly and the closer you are to the 20% equity on the house, the less PMI you pay. You can actually even get PMI waived as early as 18% sometimes, if you remember to ask them.
Also, the original submission noted that median homes cost 7x median income right now. That does not equate to 10 years of savings from responsible people.
Also, 5:1 leverage is extremely generous, and in a free market they would never happen because it’s insanely risky to the lender. That’s ignoring the fact that 20:1 is pretty common these days anyway. The only reason you can get such a generous loan is because the US government is responsible for it, and they’re the most inept financial institution on Earth.
People with big piles of capital have a great time during times of low rates, whereas the cash poor working class (even those on high incomes) still get squeezed out by lending criteria and price inflation.
> That does not equate to 10 years of savings from responsible people.
I don't agree with this. If you're putting 40% of your take home in to rent and property taxes then saving only 20% of your take home (say 12% of your gross) per year is a reasonable approximation. Saving a whole gross income (the 20% deposit if the remaining 80% equates to 4x income) is going to take you ~8 years. And most people suck at saving. And in 8 years property prices can easy go up 50-70%.
Depending on your income and where you live, saving 50% is totally doable. And since you’re into fanatical scenarios where home prices go up 50-70%, you should also apply the appreciation of the stock market to your savings (usually double or triple real estate).
> Only homeowners pay property taxes.
I pay almost $300 USD/mo in local taxes (for local services) here in the UK. This amount is linked directly to the value and occupancy of the home that I rent from my landlord.
> since you’re into fanatical scenarios where home prices go up 50-70%
The fantasy that just happened?
The national average house price index in the UK is currently at 450. In 2013 it was ~280. That's a 60% increase over 8 years, which is exactly what I said.
Regionally it's worse. London property prices have essentially matched the total return of the global stock market over the last 20 years.
And the UK is NOT special. Property is up 150% over the last 10 years in the US as well:
https://www.thisismoney.co.uk/money/mortgageshome/article-10...
https://fred.stlouisfed.org/series/csushpinsa
So, sure during the greatest bull run in home price history, prices have gone up significantly over 10 years. But it is fanatical to quote the largest bull run in history as a thing that will likely happen in the future.
And I said if you wanted to quote the fanatical scenario, then you needed to apply the equally fanatical scenario that your saving will appreciate with the market appreciation of said fanatical scenario. On Sep 1 2011, the SPY ETF adjusted for dividends was 92.69. Right now, it is 444. That's a 379% increase. 17% annually. That compares to the 6% annual appreciation of homes.
https://finance.yahoo.com/quote/SPY/history?period1=72826560...
Now, I don't know about the UK for property taxes. In the US, it's charged to the owner. Fine. But you can always choose to live inexpensively. I know people who earn six figures and spend $700/mo on rent because they live with roommates in unfashionable areas. These people save upwards of 75% of their take home. But if you insist it's impossible to save 50% of take home, then I don't know what to tell you. My friends must not exist.
But I'll give you some benefit of the doubt and assume 30% is the absolute most you can save. Then if you earn 100k and want to buy a 700k house, if you put away 30k each year, it will appreciate to 154k in 4 years. The house that increases at 6% will now be 833k, and you damn near have a down payment (18.5%) in 4 years.
This scales to any income, so don't tell me I'm out of touch with my income assumptions.
https://www.calculatedriskblog.com/2021/09/urban-institute-m...