No, not in this case. The bank will only accept this if it’s separate or if you rent out the whole place. So it should be possible to rent that part out to a stranger. I think you wouldn’t be comfortable sharing your bedroom with a stranger
But yes, if you buy a house with a separate flat it in (own kitchen etc), you could rent that out and it would reduce the annual costs. Makes buying something much easier, example:
You buy something for 1.5 million with 1.2 million mortgage. 60k interest, 13.4k amortization, 15k maintenance = 88.4k annual costs. 265k gross salary needed.
If you rent out a part of it for 1.5k/month or 18k per year, the annual costs are reduced to 60.4k. 181k gross salary needed.
If you rent out the whole thing for 3.5k/month or 42k per year → 139k gross salary needed.
I have seen it, the bank defines what % of the property is used as a rental resp. residential usage. The calculation is however more complex as it combines both rental and residential rules pro rata the % of each usage.
Rentals have different rules though, the bank I know takes 80% of the rent and subtracts the mortgage costs (interests and redemption but no maintenance costs as they are included in the 20% haircut applied to the rent) the result is then added as income if positive or expense if negative in the affordability calculation. The usual calculation for residential properties is then calculated taking into account this new income resp. expense.
However if you claim that your gf is actually paying a rent but in reality she is not you are simply lying to the bank…
Affordability is always based on the legal minimum of the amortization (not on the actual one). So with a 750k buying price and 600k mortgage:
30k interest, 6.7k amortization, 7.5 maintenance = 44.2k. With a gross salary of 116k that would be 38%.
Now we increase the amortization to 10k per year for the first 5 years which after 5 years will result in 27.5k interest, 3.4k amortization (still 15 years), 7.5k maintenance = 38.4k. With the same salary of 116k that would be 33%.
Some banks might calculate it sligthly different, for example only 10 years for the 2nd part instead of 15 years, so 5k instead of 3.4k amortization. As this would result in 34% affordability such a bank would increase the amortization to 12k/year for the first 5 years. But same principle.
Just be aware that this isn‘t something just every client advisor knows and does. Those grey cases with 34-40% affordability are always a question of argumentation from the client advisor. Bank A might reject you while Bank B approves it just because you had a better client advisor at Bank B who wrote a much more compelling application summary to the credit officer. There are several ways for giving additional arguments why such a case should be approved:
Increased amortization
Potential for salary increase (wife working more, promotions etc.)
House/flat in very good condition, no real maintenance expected for the next 10 years
Proof that the client has an above average savings rate than the average person
@Cortana can you run your affordability calculation on the following:
house price: CHF 2’000’000
own funds: CHF 1’000’000
mortgage: CHF 1’000’000
What would be the minimum required income to afford this loan? Do any of the “gray area” tricks come into place when you don’t need any amortisation (since LTV is already at 50%)?
Well 50k interest and 20k maintenance, so 70k in annual costs. Usually 210k gross required but as the LTV ratio in your example is very low, this should be doable with a 175-185k gross salary. Some banks (like mine) will approve anything up to 40% affordability if gross salary is >175k and there are remaining assets (after buying it) of >250k.
Yeah, it’s very low, but if you want to purchase a house for 2m with 200k of income, there is no other way, right? You can’t take a higher mortgage, because your affordability will get even worse. That’s why I gave this scenario. My gf has 600k savings/inheritance, but she probably won’t get any higher mortgage approved than 600k, so 1.2m is her ceiling for the purchase price. If she wants to go up with LTV to 66.6%, she can reduce her own deposit to 300k, but that will lower the purchase price to just 900k.
@Kay4rElle I know all these online calculators. But I’m more interested in the details and exceptions. Like, the website will strictly tell you that affordability is 34%, which is no good.
all clear. Super appreciated. I didn’t know the fact that Affordability is based on the legal minimum of the amortization, not the actual one. And I completely missed the fact the interest would go down because 50k is paid. Make sense.
Echoing Cortana, yes, in your example, amortisation is 0. So you only need to calculate interest 50k and maintenance 20k. No need to add amortisation. I don’t think this is grey-zone, haha. It’s plain fact that amortisation is 0 when your down payment is already at 50%.
The rental income reduces the cost of the property so in Cortana’s example, the cost is reduced from 88.4k to 46.4k. And therefore your gross income requirement is reduced from 88.4k x 3 to 46.4k x 3
Exactly. Lets assume 30k annual costs and 30k rent. One could wrongly assume that now a salary of 60k is needed (90k-30k), but in reality you don‘t need a salary at all as annual costs after rent is 0.
Unfortunately, you won’t find all these information. For example, I am working for a mortgage broker and have insight for a ton of banks, pension funds, investment foundations what their criterias are and how their exception to policy looks like.
So, unless you are not into this business, as a normal client you will get only partially insights.
Meaning, also in reality 100% LTV is possible to finance and there are also banks who do not care about the affordability ratio as long as you can provide a collateral (beside the property).
It’s a peoples business, as on the markets in Thailand
What I mean as “grey zone” is to be somehow able to breach that 33% maximum into 38% or 40%. The way I understand it from @Cortana’s example is it’s done through not counting amortization, assuming you get below 65% LTV in 5 years. So if you’re already under 65%, then no “tricks” can be applied.
Yes, you can use “a trick”; credit officer can play with the value of a property. If it’s not necessary, why aiming for a high valuation? Since 1% maintenance costs are taken into account, with a lower valuation you can lower these imputed costs and therefore your affordability.
Obviously, the leverage on this is not high, but I think one is taking whatever one can in this regard.
You can amortize passed 65%, nothing prevents you from doing that. In the calculatory affordability indeed you are not counted any amortization if you are at 65% LTV but you still need to be able to bear the interests of the mortgage which can be achieved by reducing the mortgage further thereby reducing the costs of interests in the calculation.
not sure if I should continue here or open a new thread for the following question regarding affordability
I have maxed out my affordability in my first house purchase. If I want to buy a second one in a few years and still aim for LTV at least 66%, obviously the affordability is an issue. Now in what directions should I prepare?
increase my family salary income, obviously
find an apartment with a good buy-to-rent ratio
can provide my equities as collateral? (to affect affordability?)
can I start my own company and generate some income? (200% employment?)
find a bank who doesn’t care about my mortgage at another bank? ( unlikely i guess )
The only case I’ve seen where the employee purposely reduces the value of a property is not to fall into the luxury good category because it adds further requirements. In general LTV is more important than 1% in the affordability calculation because the LTV captures the risk for the bank, the lower it is the better.
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