"Disposable income"?

[woodpijn]

A mortgage adviser wanted to know our disposable income. We weren't sure how to answer, and the more we tried to drill down into what he meant by it, the more confusing it got. The concept seems to rely on two assumptions, both of which I disagree with: 1) that there's a clear binary division between needs and wants, and 2) that this corresponds to

Comments

[anonymous]

Would you be able to answer the question "how much is your disposable income?"

Um… yes? Obviously?

I mean not off the top of my head, I'd have to look up the numbers, but it doesn't seem anywhere near as weird a concept to me as it does to you. I would just add up all essential, non-discretionary spending (rent, tax, utilities, food etc), amortising stuff that doesn't happen n a regular monthly basis so, like, do it over six months and take the average rather than a single month which might have more or less than average) and take it away from my income, and that's my disposable income.

I don't understand where your confusion is.

For instance, 'charity giving, kids' extracurricular activities, subscriptions to video streaming services/magazines/websites' - these all come out of disposable income, isn't that pretty obvious?

Similarly savings come out of disposable income.

'Big discretionary purchases like furniture/appliances and (in non-pandemic times) holidays' - again, these come out of disposable income. The key is 'discretionary'. If you don't have to spend it, then you're spending disposable income on it. That's what 'disposable income' means: income that you are free to dispose of as you wish, like on a holiday, rather than it being allocated for you.

[anonymous]

Although, one thing that does occur is that if this is about a mortgage then presumably you are thinking of moving house. And quite a lot of non-discretionary income would change if you were living in a different house: it might be in a different council tax band, the rateable value might be different which would affect the water charges, a house with different thermal characteristics would cost more or less to heat, and so on.

Even just being in a different place would affect your fuel consumption to and from work, which will mount up even if it's just a tiny amount.

So a large element is just going to be guesswork anyway.

[woodpijn]

Actually borrowing for an extension rather than moving, so most of that won't apply, although a bigger house will cost more to heat.

I work from home (even in non-Covid times) and Alex cycles to work, so the fuel thing shouldn't matter even if we were moving (unless we moved too far away to cycle, but we'd be extremely unlikely to do that).

But it's definitely a huge amount of guesswork. The utility company increasing the prices, or an unusually cold or mild winter, or getting a new energy-efficient washing machine or tumble dryer, would probably make more difference to utility bills than the moving-related changes you suggest.

And any of those changes are still smaller than the changes we could make by cutting down on discretionary spending (disposable income in your and my sense but not the mortgage adviser's sense).

[woodpijn]

That was basically my understanding, yes.

But it didn't seem to be what the mortgage adviser meant by it. He explicitly said all our direct debits and standing orders (including regular charitable giving, kids' activities, subscriptions, any regular transfers to savings, etc) should be subtracted from our income when calculating it. Hence my confusion about what he meant by "disposable income", because it's *not* the same as what I understood it to mean, and doesn't seem to be a coherent concept.

When I used terms like "discretionary" I was trying to highlight this disconnect between my understanding and the adviser's.

[anonymous]

Oh, right. He doesn't mean what an economist would mean, then.

I guess that the idea is that if you are thinking of building an extension, rather than moving (which would change your finances totally so it makes more sense to work out how much you can afford), it must mean you have spare money over on top of what you are currently using to fund your lifestyle, and it sounds like he was trying to work out exactly how much you have spare.

(And then of course leave a buffer in case interest rates were to rise from their current historically low levels, though I've been hoping for that to happen for decades now and it still hasn't).