What percentage of net income is acceptable to spend on mortgage repayments?

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mopiaroy

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Hi all,

I am currently in process of applying for a mortgage and I'm trying to determine what percentage of take home pay I should realistically allocate to mortgage repayments.

I'm aware that this is quite a subjective question, so some details about my situation:
  • I'm married and my partner and I are both 32.
  • We have a combined income of €145k.
  • After tax and pension contributions we have around €7000 net monthly income.
  • We have no debts.
  • We currently have no children but, all things going well, would be looking to have 2 children in the next couple of years
We are looking at a new build in our area (€500k) that ticks all of our boxes. We are first-time buyers and looking for a mortgage of €450k (90% LTV). With mortgage rates being as low as they are, I'm guessing it would be prudent to fix for a longer, rather than shorter term. Therefore, some of the mortgages we have been looking at through our broker are as follows:
  • Avant 7 year fixed (30 year term) - 2.25% rate - €1,720.11 monthly repayment - 24.6% of our net income
  • Avant 10 year fixed (30 year term) - 2.4% rate - €1,754.74 monthly repayment - 25.1% of our net income
  • AIB 5 year fixed (35 year term) - 2.25% rate - €1,549.06 monthly repayment - 22.1% of our net income
I'm interested to hear your thoughts on whether any of this looks reasonable as this is new territory for us - thank you in advance!
 
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Given your age & your plans for a family, I would suggest doing your numbers on current state less either one full salary (add the tax credit benefit to the second) or less average childminder/creche cost where you live (a few phone calls should get you rates or ask your friends with kids).

Or if you think family will be able to help but also think of the time frame, will parents who are 60 now still be able at 70? That in reality is what you are going to be living off in the short term and potentially for the next 12 years as tbh afterschool care is almost the same again! Also consider whether maternity leave is fully paid as you will need to cover that if not.

It's probably easy for me to say this as I bought at a different time but I would really not like to be taking on a mortgage term that would have us both working until 62. Will your kids be able to live at home for college or early working life? I'd your mortgage is 30 years you potentially have college expenses and mortgage at the same time.
 
I tolerated 30% of household net income at your stage in life (plus small kids) but there was zero left over at the end of the month.

Central Bank rules make it hard to get anywhere near 30% now though unless you shorten your term.

Generally speaking it's best to borrow to the max with a long term and overpay if you have the ability over time.
 
The mortgage on our first house was at a similar % to what you're considering, and we were more than fine. Notwithstanding plans for kids, your incomes should grow over the coming years, which will reduce the % over time.

I agree with others though, plan ahead. You can save for periods of reduced income while one of you is off work, providing of course you both plan to return to work, that's a discussion worth having before making a big financial decision like buying a house.

I'd recommend factoring in mortgage protection and home insurance as part of the figure, they're mandated by lending institutions, neither are normally huge amounts, but all these things add up. With a new build, you won't have much in the way of maintenance costs for the coming years which should help keep a lid on overall home ownership costs.

Best of luck!
 
I would also have a plan to overpay down the line...so say the lean years ahead furnishing and then babies, maybe opt for a fixed rate and plan to attack the mortgage in the medium term as finances improve either in reduced childcare or increased salary. Future proof so that you can potentially take parental leave or maybe not advance as fast in your career in the early childhood years. It just makes life less stressful if you have choices.
 
It might help if you reframe your original post using the money makeover template

Key Post - Basic information required for the "Money Makeover" forum

It can be difficult, but please try to use a meaningful title in your thread For example "27 year old with mortgage arrears". You will get a much better and much more coherent answer if you give as much information as possible in your first post. For example, if you give your mortgage rate, it...
www.askaboutmoney.com

IMO, you should choose the lowest interest rate first, followed by the longest term fixed for as long as possible. In your example, that would be the AIB 5 year green. The reason for choosing the longest available term (35 years) is for flexibility. But really it is a toss up between that and the Avant 7 yr fixed

I would still highly recommend that you are capable of overpaying in line with a 25 year term or shorter. But at least you have the flexibility if/when kids come along to drop back to the minimum required monthly payment. So choose 35 year term but overpay it like a 25 year term

mopiaroy said:
  • I'm married and my partner and I are both 32.
  • We have a combined income of €145k.
  • After tax and pension contributions we have around €7000 net monthly income.
  • We have no debts.
  • We currently have no children but, all things going well, would be looking to have 2 children in the next couple of years
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It's subjective and each to their own but I typically measure my outgoings based on net income before pension/BIK. In your case, if your income was a 50:50 split, your net take home is in the region of €8k. I think it is important to measure it this way because pensions are a form of savings so you are already contributing €1k/8k or 12.5% of your net for pensions.

And similarly with your mortgage, based on a 25 year term, your payment is €1960. Going with either AIB or Avant, can you overpay to ~€2k/month consistently or 25% of your net? In 5/6 years time, you could easily have 2 x childcare fees totaling ~€2k

So are you comfortable with 25% mortgage, 25% childcare, 12.5% pension and 37.5% for everything else?? And that assumes you both continue working at full pay. It is important to plan out your cashflow because in those most expensive years of childcare, you can reduce your mortgage and pension commitments until childcare starts to reduce and then you can get back to focusing on mortgage and pension

mopiaroy said:
We are first-time buyers and looking for a mortgage of €450k (90% LTV).
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This is another important point. You are looking at new builds so I assume you are getting the HTB. As single high earners, you should have been able to save that deposit relatively easily and quickly and should probably be able to afford a much bigger deposit. If it has taken a long time, then you should question why that is.

There may be many genuine reasons for "only" having the 10% deposit such as paying high rents, recent significant jumps in salary, wedding expense etc but its always worth having a look back to see if you were reckless with your spending and acknowledge that it can't continue.

And with a new build, the first year will be expensive and will limit the ability to overpay a mortgage. New builds come in lots of different levels of finish so if you need to budget for flooring, kitchens, tiling, blinds/curtains and obviously furniture, then you need to start getting that figure in mind.
 
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Thanks all - there's some great advice here and definitely a lot to think about.

It's subjective and each to their own but I typically measure my outgoings based on net income before taxes/BIK. In your case, if your income was a 50:50 split, your net take home is in the region of €8k. I think it is important to measure it this way because pensions are a form of savings so you are already contributing €1k/8k or 12.5% of your net for pensions.
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That's a good point - I've been unsure of what to base my % calculations on since pension contributions and BIK aren't really "commitments".

There may be many genuine reasons for "only" having the 10% deposit such as paying high rents, recent significant jumps in salary, wedding expense etc
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All three of those are true! I've doubled my salary in the past 6 months (mainly due to me being paid under the market rate at my last company). I'd like to think that we're fairly shrewd with our money and this is why I'm trying to plan out the next few years. We want to buy a house that will meet our needs in a location we love but I also don't want to get into a stressful situation with a burdensome mortgage either.

I would still highly recommend that you are capable of overpaying in line with a 25 year term or shorter. But at least you have the flexibility if/when kids come along to drop back to the minimum required monthly payment. So choose 35 year term but overpay it like a 25 year term
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We both plan to work until retirement but having said that, I'd love to have the mortgage paid off before we're 60 so paying on a 25 year schedule makes a lot of sense.
 
mopiaroy said:
All three of those are true! I've doubled my salary in the past 6 months (mainly due to me being paid under the market rate at my last company). I'd like to think that we're fairly shrewd with our money and this is why I'm trying to plan out the next few years. We want to buy a house that will meet our needs in a location we love but I also don't want to get into a stressful situation with a burdensome mortgage either.
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That's good to know and it's what I assumed. You've been able to pay for a wedding, save for a deposit and increase your salary so you are definitely a saver. You should be able to go back through the last 3-5 years and assess your own affordability by the rent you have paid and the total you have saved for wedding/deposits.

I would be much more comfortable with borrowing the €450k knowing the above. You will have a LTI of 3.1 at 32 so you are in a very reasonable position. You will be able to overpay significantly for the next few years (even with 1 child) and will likely only have to reduce the overpayments if/when you have 2 kids in childcare (assuming it is childcare and that you don't have family lined up to mind them)

To add to your list, you should probably consider Haven's 4 year green rate too (see here) which is now 2% and doesn't have restrictions on LTV and I believe the €2k fee is available to FTB's and switchers.

You are obviously making the tradeoff of a cheaper rate vs the longer certainty with the 7 year Avant fixed rate but with a principal of €450k, I would be inclined to take the 2% rate. The 0.25% reduction is €1125. Over the 4 years and with a reducing principal, you will save ~€4k in interest plus you have the €2k bonus. You would potentially be €6k better off in 4 years but you need to be aware that when you need to switch/refix, rates may not be as low as they are today
 
There is war in Europe, inflation is going through the roof.

10 years fixed at 2.4% will look like an unbelievable opportunity very soon. I doubt it will last. Grab it while you can.

Take the mortgage over as long a period as you can, it is free flexibility. The time frame of your mortgage now has little connection with how long it will be until you actually clear it.
 
At one stage we were at a point where the mortgage amounted to 32% of our monthly income. I don’t recommend it in terms of quality of life TBH. We paid it off a couple of years back and it is a decision I have never regretted.

Good luck with it all OP.

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