5 ms·

Note there is also a distinction to be made between the absolute money leaving the bank account every month, and the portion of that money that is paying off th

Note there is also a distinction to be made between the absolute money leaving the bank account every month, and the portion of that money that is paying off the principal of the loan. For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment. Being able to actually afford the whole amount remains a concern, of course. Where I live obtaining mortgages for any significant portion of the cost of a property is generally hard for people on anything close to an average income or below, and so landlords can get away with charging rents that are literally higher than the total mortgage payment would be. Even though the tenant can demonstrably afford the repayments - they are literally paying a landlord more every month! - the bank will not lend more than a fixed multiple of their salary and so they cannot buy. I understand this is something of a local issue, though.

ryandrake 4y ago
> For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment Yep, this is forgotten in many discussions comparing rent and mortgage. Only the interest portion of your mortgage matters for the sake of comparing expenses. The principal portion is money going from one of your pockets to the other and does not represent an expense.
fargle 4y ago
You are right, except that you also have to account for the "cost of money". Meaning from your principle being "tied up". So you essentially need to account for that as well. For example, if my capital investment is $60000 (and the bank's is $240000 - remember this house was bought at a favorable time), that $60000 tied up is costing me $200-$400 (4%-8%) per month. PITI: Principle+Interest+Taxes+Insurance. Out of which, ITI is straight up cost. P+I is a constant through the life of the loan. At the beginning P is very small in relation to I and increases over time. So for the first 5 years or so, P is so small that it essentially is a wash with your cost of lending yourself the money. After that, I think you can take some small credit for principle repayment. Adding maintenance and assuming 5-10% vacancy, it's normal to have rents be 120%-130% of the equivalent PITI when things are stable - I don't think that's just a local issue - that's healthy. This covers how much rents must be to be not a loss for the landlord. But if you comparing rents to purchase, you also have the same small effect happening for the purchasers potential mortgage too. People have noted the tax benefits of deducting your interest and local taxs (I+T), but that may have diminished a little due to much higher standard deductions since 2017. I have not noticed people pointing out that another benefit is that any "investment" growth, unearned equity increase when your house appreciates, is tax free on your primary residence. That can be substantial. While it's true that mortgages have a debt-to-income ratio limit (it's not income to loan ratio), so do landlords, except the very worst slumlords who don't care. Why would people pay a 20-50% premium to rent? Good and bad reasons: - short term, no commitment, might move, etc. - bad time to buy right now - bad credit - can't get together the sizeable down payment - scared - underestimate the financial benefits Several of those reasons are rational even to pay a premium. But of lot if it is irrational. TFA didn't adequately address any of the "good" reasons not to buy a house and mangled the rest.
- tsukikage 4y ago
  > it's not income to loan ratio Here, it literally is; typically 4.5x the annual household income is the most the average bank will lend you. There is also a separate affordability test which works the way you describe. https://www.google.com/search?q=uk+mortgage+to+salary+ratio https://www.google.com/search?q=uk+mortgage+to+salary+ratio
  - fargle 4y ago
    Sorry, I was talking specifically in the US. I think you may be talking UK. We have a "front-end" ~28% and "back-end" ~36% debt to income (DTI) limits (typically). Front-end is ratio of mortgage loan to income and back-end is ratio of all debt to income. The interest rate can wildly change the size of loan you can get for a given income because of this method (as we saw prior to last year). If you had a fixed ratio, when interest rates go up a 4.5x mortgage would be a lot less affordable. I can't imagine paying a 8% loan on $450,000 with $100,000 income. That's be $4000 a month, front-end rate of ~48%. Ouch! Guaranteed foreclosure. Neither system is perfect, I still don't like that non-debt expenses are not counted and it should be net income after taxes.

ryandrake 4y ago

> For renting to be better value than buying, the rent has to be cheaper than just the interest part of the mortgage payment plus whatever portion of the maintenance costs is for things a landlord could be persuaded to cover, a somewhat lower bar than the entire payment Yep, this is forgotten in many discussions comparing rent and mortgage. Only the interest portion of your mortgage matters for the sake of comparing expenses. The principal portion is money going from one of your pockets to the other and does not represent an expense.

fargle 4y ago

You are right, except that you also have to account for the "cost of money". Meaning from your principle being "tied up". So you essentially need to account for that as well. For example, if my capital investment is $60000 (and the bank's is $240000 - remember this house was bought at a favorable time), that $60000 tied up is costing me $200-$400 (4%-8%) per month. PITI: Principle+Interest+Taxes+Insurance. Out of which, ITI is straight up cost. P+I is a constant through the life of the loan. At the beginning P is very small in relation to I and increases over time. So for the first 5 years or so, P is so small that it essentially is a wash with your cost of lending yourself the money. After that, I think you can take some small credit for principle repayment. Adding maintenance and assuming 5-10% vacancy, it's normal to have rents be 120%-130% of the equivalent PITI when things are stable - I don't think that's just a local issue - that's healthy. This covers how much rents must be to be not a loss for the landlord. But if you comparing rents to purchase, you also have the same small effect happening for the purchasers potential mortgage too. People have noted the tax benefits of deducting your interest and local taxs (I+T), but that may have diminished a little due to much higher standard deductions since 2017. I have not noticed people pointing out that another benefit is that any "investment" growth, unearned equity increase when your house appreciates, is tax free on your primary residence. That can be substantial. While it's true that mortgages have a debt-to-income ratio limit (it's not income to loan ratio), so do landlords, except the very worst slumlords who don't care. Why would people pay a 20-50% premium to rent? Good and bad reasons: - short term, no commitment, might move, etc. - bad time to buy right now - bad credit - can't get together the sizeable down payment - scared - underestimate the financial benefits Several of those reasons are rational even to pay a premium. But of lot if it is irrational. TFA didn't adequately address any of the "good" reasons not to buy a house and mangled the rest.

tsukikage 4y ago
> it's not income to loan ratio Here, it literally is; typically 4.5x the annual household income is the most the average bank will lend you. There is also a separate affordability test which works the way you describe. https://www.google.com/search?q=uk+mortgage+to+salary+ratio https://www.google.com/search?q=uk+mortgage+to+salary+ratio
- fargle 4y ago
  Sorry, I was talking specifically in the US. I think you may be talking UK. We have a "front-end" ~28% and "back-end" ~36% debt to income (DTI) limits (typically). Front-end is ratio of mortgage loan to income and back-end is ratio of all debt to income. The interest rate can wildly change the size of loan you can get for a given income because of this method (as we saw prior to last year). If you had a fixed ratio, when interest rates go up a 4.5x mortgage would be a lot less affordable. I can't imagine paying a 8% loan on $450,000 with $100,000 income. That's be $4000 a month, front-end rate of ~48%. Ouch! Guaranteed foreclosure. Neither system is perfect, I still don't like that non-debt expenses are not counted and it should be net income after taxes.