THE MONEY PLANNER

Mortgage payments ?

WE ARE all familiar with what a mortgage is, but how do I know how much I can afford? By that I don’t mean how much the lender will lend me, but how much can I afford to pay each month?

ATHE 28/36 rule measures borrowers’ ability to afford their mortgage payments based on their household’s gross

(pre-tax) monthly income, monthly housing-related payments, and all other monthly debt payments.

The rule states that a household should spend no more than 28% of its gross monthly income on total housing expenses; which I call MIC (mortgage, insurances and council tax), and no more than 36% on all debt, including housing-related expenses and other recurring debt service; which I call MICOD (mortgage, insurances, council tax and ongoing debt)

Included in MIC are any rental payments (shared ownership properties), ground rent or service fee payments due. You do not include other housing expenses like utility bills or TV packages.

If you expect to pay £850 in monthly mortgage payments, plus £30 in buildings and contents insurance and £90 for life assurance, plus £150 in council tax, your MIC costs would be £1,120 per month. Thus, the household must have a gross monthly income of at least £4,000 per month to meet this 28% rule, this is equivalent to a couple earning £24,000 per anum each.

The 36% rule includes MIC plus all credit cards, car loans, student loans, and other personal loans.

Where applicable, it also includes child support and other committed expenditure such as spousal support payments if expected to last 12 months or more.

The borrower with £1,120 MIC payments might also have a £200 monthly car payment, and a £120 credit card payment. MICOD of £1,440pm would need a gross monthly income of £4,000pm.

With these payments at 36% it leaves approximately 20% for tax and national insurance (actual will be nearer 17%), 12.5% for long term investment and approximately 30% for living.