9 red flags to think about before buying your first home
Buying your first home is a momentous and life-changing event so it’s easy to get swept up in the excitement. What sort of house, where should it be and what about furnishings?
On top of all this, buying your first home is probably the biggest financial decision of your life and as exciting as it is, it’s not something to rush into.
Fortunately, Christchurch and Canterbury is currently a buyer’s market, meaning prices have levelled and there’s plenty of houses on the market. So if you are buyer, you are in a box seat and there’s not as much pressure as when prices were increasing rapidly.
With conditions in your favour, it’s a good idea to take time to survey your choices and weigh up options. But before you get too far down the track we’ve identified 9 very important red flags to think about.
They are all important and if you don’t have an approach for each one there’s always a possibility they could become bigger hurdles in the future.
1. Reduce debt to help your financial position
This is probably the biggest hurdle for first home buyers – reducing debt so you can boost the potential to save for a deposit.
For a lot of Kiwis the main cause of debt when buying a first home is a student loan, but while this can be a millstone if you can show you’ve been responsible in paying it off regularly this will be taken into consideration when applying for a home loan.
It’s other types of debt that can really blemish your ability to borrow such as: maxed out credit cards, multiple hire purchases or interest free purchases and personal loans. These are the ones that need addressing before a lender is going to look at you favourably.
It’s a simple mathematical law that the more debt you have the less savings you have. You could save $80,000 for a 20% deposit on a $400,000 home but if you have $40,000 of personal debt you really only have a $40k deposit.
Starting early to reduce debt is paramount - banks can lend you a large amount of their own money but they need to see that they can trust you to manage it. The more reliable you are, the better your prospects of getting the loan and home you desire.
2. Borrowing Costs
Trying to figure out future interest rates is almost impossible – if you read back over the last couple of years you will see media reports saying interest rates will rise significantly followed by reports that they could also ease. Go figure!
While it’s difficult to foresee what will happen over the next few years, one thing is clear currently is that interest rates are still at historic lows so the best piece of advice is to be conservative.
By this we mean don’t borrow up to your limit now just in case interest rates do rise. The best result of being conservative is you may be able to pay off more of your loan principal, which is the actual sum of money you’ve borrowed and not the interest.
Getting advice about this is important so try using a mortgage broker – because of their experience they will be able to give a clear steer on what amount suits your circumstances and which is also more likely to get a seal of approval from a bank.
3. Think ahead about mortgage repayments to support your decision now
Not stretching yourself to the limit and being conservative will mean you could pay more than the minimum contribution to your principal every month – and there are lots of reasons why this is a good idea.
The first and most obvious is that you will pay less interest overall, because you have less debt. The second reason is it gives you more flexibility to move on to your next home perhaps when you start a family or move jobs. If you can reduce debt over the long term and house values rise, the equity you have in your home just gives you more options.
4. Be aware of being overambitious
A buyer’s market can make some people too ambitious about what they can afford. While it’s nice to dream, the banks are likely to turn down a mortgage request if your ideas are too big for your wallet!
It’s always good to be realistic as it will help you avoid disappointment later on. When scouting for a home, start with what’s within your reach and, more importantly, what satisfies your needs, not simply what you’d like to have.
Looking at the district where you would like to buy is a good way to start. If the area and your would-be-neighbours match your type of lifestyle and your income bracket, it’s a good benchmark that properties in the area are likely to be within your reach.
5. Location, location, location and then the cost of location
There are lots of additional costs to be wary of such as rates, transport costs and how these will be affected by a change in commute, and whether you may need to buy another car. Looking at it differently, if you are a couple could you survive with one car?
6. Long term needs and crystal ball gazing
No-one can predict the future and it’s not sensible to put yourself under pressure to base your first home purchase on what may happen. However, it’s always wise to think about the plans you have, for instance around family and career. Are you likely to start a family or have more children, so you will need a bigger house, or one closer to schools? Could you need to move for work? Would ageing parents mean a move closer to them?
It’s also wise to think about balancing paying off your mortgage with other savings and investments. You may also consider buying an investment property later on based on the equity in your home. These are all important things to consider.
7. Always survey what you are buying
Old houses might come at a better price than new ones, but the costs of repairing or updating them could outweigh the savings.
Make sure the house you want to buy is surveyed, structurally sound and everything in it works and is up to standard eg: the plumbing and electrics.
Kitchens and bathrooms may need upgrading, and décor even from ten years ago may not suit what you would want.
Having a home is very personal so you need to factor in costs of making it so.
8. Interest-free looks good, but it can be a poisoned chalice
Think about what happens when you move in – you will need furniture, white ware, curtains and blinds, and the list goes on.
It’s very tempting to go on a massive shopping spree and the sweet scented interest free deals look ever so tempting.
But beware and don’t be too quick to agree - what looks like a good thing at first might eventually get you into debt, instead. Interest free can mean big interest bills later on.
If you are on a budget when fitting out your first home, try TradeMe or even second hand stores. Do some shopping around and you will be amazed at what you can find.
9. Be confident and start making offers
Getting a great deal might seem like a stroke of fortune but as they say, diligence is the mother of good luck - you’ll get better deals by looking for them than you do waiting for them to fall into your lap.
If you are in the position to buy, try making an offer on a house even if you think it’s low. At the very least, you will gain knowledge and confidence. So don’t sit back, step out and get some practice.
Turn red flags into green ones
There’s lots to think about before buying your first home and it’s good to know about some of the hurdles you may face beforehand. As you may have guessed the most important piece of advice is be conservative at the outset.
Your saving grace is there are a lot of people out there who can help, a mortgage broker probably being your best ally as you sift through what you need to do.
Most importantly, a mortgage broker can get you the best loans on the market, and that means saving you money. But they can also help guide and advise you on all the steps you need to take to make sure you get the keys to your own front door.
So if you would like to turn red flags into green ones why don’t you give us a call at Taurus? We love talking to people about their goals and dreams - we can come to see you and have a chat over coffee at your favourite café!
Mobile: 027 352 6262
Phone: 03 366 6087
Posted 7 Dec 2017