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.
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
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.
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.