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So this query/misunderstanding is quite common and I want to very briefly explain why this is the case. Let’s take a UK example/figures because that’s where I am and where most of my followers are. I am not an expert, but I'll try very simply. Thread… https://twitter.com/KatMeanJean/status/1361435115495190529
You’ve found a lovely 1-bed flat in Townton on the market for £180,000. Excellent. You know that over 25 years a £180,000 mortgage at 4% will cost £950/month and your rent is already far more so you should be a safe bet, right? Well, no.
First is the obvious point. While you can pay £950 at the moment, mortgage rates are historically incredibly low. In 1995 you'd be looking at a rate of 10% or more... That's over £1600/month. The bank needs to know you could afford this if they increased.
Next the bank needs security of knowing not just that you’re safe but that the property they’re lending against is worth the amount you’re willing to pay for it, and that it’s going to continue to be worth that much. Prior to 2008 deposit-free mortgages were available.
You could literally buy the house just with proof of income. There were even “110%” mortgages where you’d buy your £180,000 flat and be given £18,000 to… do whatever with. Refurbish it? Great. A new car? Why not! Hookers and blow? No body cared…!
And then 2008 happened, and values tanked, and suddenly everyone owed £200,000 on their £130,000 flats. Their incomes dropped, their payments stopped… You can see why this is a problem, yes? The loans weren’t able to be repaid.
So the less deposit you have the more interest you pay; You’re a higher risk not just personally, but through the property value. There’s more chance of the value falling if economic conditions worsen, thus during COVID almost all 95% mortgages have gone. Too much risk!
The more you're able to stump up to start with, the less of the property value you need to borrow, the more comfortable the bank is with lending you the money. They know that if things went badly, they'd get their money back - Or at least enough of it to remain profitable.
And then there's second part of this equation. The property is a security for the loan and as well as economic factors, property maintenance affects the value.
The bank needs to know that while you may be able to afford your rent right now, could you also afford to replace the boiler this year? What if the roof leaks? You can’t just call the landlord and the bank still needs to know the home is well-maintained as security for the loan.
So in summary, yes, you can afford your rent - But for the bank to lend they need to know you can afford your mortgage, afford to maintain the property, and to do both of these things if the rates go up and the value goes down. END.
