Don’t let your house buying eyes get bigger than your wallet

money wallet

When the Reserve Bank’s cash rate dropped to 1.5% in early May this year, home buyers jumped at the chance to buy the home of their dreams. Then the OCR dropped to 1.0% in August and the jury’s out on whether it will go lower.

With interest rates at historic lows, there’s been a lot of media commentary encouraging first home buyers to look carefully at how the market has changed and whether it is a good time to buy.

We agree - for those who have the right deposit and can afford to buy a home, it is definitely a good time to consider this life-changing move.

However, what has happened since May is many first-home buyers have taken mortgages that are five times their annual income, a high level of debt.  Regional variations exist but according to Reserve Bank statistics from June 2019, 33 percent of first home buyers are taking on debt at this level, or over.  

Here’s an example of what this means: let’s say you have a combined income of $80,000, five times means your debt is $400,000.  With this mortgage you could have bought a home valued at $500,000, as you would have put down a deposit of 20 percent, or another $100,000.  Ask the question, do you need a first home worth half a million dollars? 

The key point to consider is while the OCR and the collective interest rates of banks and other financial institutions may look attractive, you have to also be comfortable with paying the interest on your loan, as well as some of the principal, and have money over to pay for living expenses and some savings.

To help you avoid having eyes bigger than your wallet, here are a few questions to ask yourself before you jump into buying your first home

1. Are you financially ready to pay for the house you want?

While you are researching the house you want, work out how much you can afford and how much you would like to afford.

There’s an important difference here - you may be able to afford more, but think carefully about how it may impact other things, for instance, your current lifestyle or future plans.

2. Are you ready to compromise if the numbers don’t stack up?

It’s great to get on the property ladder, but it would be even better to get on it and still have some spare money at the end of each month.  Your first home won’t be your last so having some extra finances will help you plan for the next one, which hopefully will be another step towards your ideal home.

Key advice here is to do the sums and see if buying a less expensive house is a better idea.

3. Have you talked to lots of people?

You will know lots of people who have bought homes, so talk to them.

Most people nowadays will Google information, when a chat over a coffee or wine would be just as useful, and more fun.

Talk to family or friends, ask people at work or when you are at your next barbecue.  People love being asked for their advice - whether they’ve bought a house recently or way back.  Maybe you’ll find out something that the Internet hasn’t mentioned! 

4. Will you have savings after you buy the house?

Buying a house not only means saving a deposit and then securing the mortgage, and paying for interest and principal, it also comes with all sorts of other expenses too.

Furnishings, household goods, insurance, rates, maintenance and repairs, will all be on your list.  There will always be a lot of shopping to do.

These additional expenses can add up to about 5% to your home price - yikes!  This is a trap that a lot of first homeowners fall into. 

It’s always advisable not to stretch yourself too much and have a financial cushion so you can feel at home, in your new home.

5. Have you thought about your long term plans?

I get it - you want to just enjoy buying your first home and being in the moment - you can think about the future later.

Trouble is, the future catches up pretty quick and you should think about what happens next - in three, five or ten year’s time? 

Will you settle down, start a family, move overseas, buy a business, move out and into a larger house, buy an investment property or move while keeping your first home to rent out - the possibilities are endless. 

While you may not want to think about this too much now, try polishing off the crystal ball.  Remember your future plans will be supported if you can build up some equity in your home.

6. Have you thought about buying as small as possible first with your eye on your dream home later?

We talk a lot about getting on the housing ladder, and it is exactly this - with your first home, you are aiming to be on the first rung.

Let’s say your first home is a one or two bedroom unit or flat, which is well within your means.  You can live there for 2-3 years, build up some equity, have some money to enjoy life, and then once you’ve learned the ropes of the housing market, you can start planning your financial goals for the home you want to buy later. 

Sounds sensible doesn’t it?  This type of approach is worth thinking about.

7. Consider things beyond your control?

There are many things that could affect your finances and you will have no control over them. 

For instance, you could get a fantastic promotion or, you could lose your job.  The economy goes up and down, and interest rates with it.  A very sad but real situation in a lot of people’s lives is relationship breakdown and this has enormous impacts on property ownership. 

The best approach to protecting yourself is to have some savings or equity in your home, so if financial stress arrives, you have some resources to manage it.

 

As mortgage brokers there’s nothing that pleases us more than helping people buy their first home.  However, only if it suits your current budget and lifestyle, and your future plans, as much as you can know them.

At Taurus Home Loans we are experts in providing advice when you have questions about making this important decision and we will always make sure people’s eyes are not getting bigger than their wallets.  Why not give us a call and we will buy you a coffee.

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 References:

https://www.stuff.co.nz/business/114937041/nearly-half-of-auckland-firsthome-buyers-in-debt-to-fives-times-their-income

https://www.rbnz.govt.nz/news/2019/08/new-debt-to-income-data-informs-new-zealands-mortgage-risk

 

 

Posted 29 Oct 2019