30th April 2018
We don’t ever go out of our way to be pessimistic on this blog, in fact we tend to be quite the opposite, having a firm belief that optimism is the only valid way when it comes to investing. However, when it comes to borrowing, which as we all know is essentially the reverse of investing, it pays, quite literally, to be even a little pessimistic!
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Buying a home, whether it is your first, second, third, fourth (well maybe the novelty wears off around now!) or whatever, is an exciting time. For many purchasing a home is a way out of a tough situation or indeed an opportunity to put down roots that they feel desperate to put down. We have no intention of talking anyone out of doing what they need to do, but invite you to consider some aspects prior to committing.
You see a house you like, perhaps even a house you have been dreaming of for a long time and all-of-a-sudden you are hell-bent on getting THAT house. You have the deposit saved, the savings-history achieved, the Paddy-Power Direct Debits long-since gone out of your past few years statements, and are ready to rock and roll immediately! Far be it from us to rain on your shiny new parade, but it is always prudent to have a look at the potential pit-falls and take some steps to reduce the chances of things going wrong.
So what are these Pitfalls of buying a home?? By way of intro, I encourage you to ask a friend who has just spent €1,000 or a multiple of it on a bicycle if they are happy with their purchase! Very few people are brave enough to pay that much money for a bike only to turn around and say that they don’t actually like it!! So it is even less likely that you will find someone who has paid 300 times that on a house for them to admit that they regret buying it! Having said that there are mistakes being made by some, so in order to help others avoid the same fate we will explore the most common that we see happening at this moment in time….
So you have decided that you are going to buy a home. You have a nice deposit saved and you are ready to go house shopping. You invest time and energy into viewing houses, looking on daft.ie and dreaming about living in a certain area. Then one sunny day you happen to view a house that just grabs you, it ticks all the boxes on ‘the list’ for you, you are in love, you gotta have it!
So you get in touch with you broker, or your bank and tell them that you want to buy this house, and that you need a mortgage asap as you are ready to rock and roll, and this house won’t be on the market for a long time, its a cracker! However you have fallen in love a little prematurely for you do not qualify for the mortgage, you cannot meet the lender’s requirements. A common reason for this is not having sufficient ‘savings-history’ created. You have saved sporadically, only adding money to your savings now and again as it suited instead of steady and consistently. Despite the fact that you may have being paying rent steadily every month it is not sufficient repayment-proof when they stress-test the rate of a potential mortgage. The lender responds to your application with a decline, and you have to now get your ducks in a row so that you can have another stab at the application in 6 months or so……by which time that shiny house you had your eye on is long gone!
Solution: Start saving consistently and steadily. Figure out what the repayments might be on a house that really appeals to you long before you actually plan on buying one, and either pay rent, save (or a combination of the two) more than you would be repaying. If saving, then it’s a useful idea to save into a single account that you do not access or withdraw funds from. Lenders will love you for that!
So lets now assume that you get the mortgage for the house, you’ve crossed that hurdle. The most common error we see people is actually borrowing more than they needed to! They aim for the max that the lender will give them instead of the amount that they actually need. This might seem a little weird but it is definitely the case, particularly in the current house-price market. It is like that idea that if something is scarce then we will want it even more, the same can be said when borrowing money for a house, if there is a limit on it we’ll want to be pushing that limit!
This error of borrowing too much only really rears its head when, a few years later, the borrowers life changes, maybe due to the arrival of kids or changed circumstances, and they want to either reduce the hours they work or one wants to give up work entirely. The trouble is that because they may have borrowed a significant sum of money, requiring a hefty monthly repayment, they may now be left with little choice but to keep working full-time in order to repay their mortgage.
The actual impact of this is that the borrowers are sowed into repaying this debt, which limits their options and their choices in terms of the life they want to live. Had they borrowed less and bought a cheaper/smaller/less desirable home then perhaps they may well have the financial wiggle-room to live the life they really do want in the years ahead.
Solution: Consider not just your current circumstances and lifestyle but how that might likely change over the medium term based on what you hope to be doing. We can’t predict the future obviously but we can usually figure out what our goals and aims are and plan accordingly. Taking that into account someone might decide to pick an alternative route, an alternative amount of borrowing in order to help make that dream a reality.
Not Having ‘The List’:
We wrote about a new development on the ‘Meath-Gold-Coast’ a few months back that had a coffee cart parked just outside the show-house that was giving free Americano, Latte, Cappuccino or whatever yer having yourself, to all visitors to the show-houses, and the place was mobbed! We are all subjected to marketing constantly but this was the first time I had seen free coffee at show-houses, it was a neat trick in fairness! It could surely only add to the feel-good factor as you carried your steaming cuppa into the shiny and new show-homes. You would want to be a cynic, or indeed you would need to have a disciplined ‘list’ not to be succumbed by it! Not have ‘the list’ can often lead to people buying homes that look the part but might not actually have the features that they really value, and end up having to move again in a few years!
Solution: A ‘list’ is, as the name suggests, a list of all the things that you are looking for in a house. It quite literally lists the features you ideally want to have in a new home. It will also have a figure written on it, a figure which represents the very most that you are willing to pay for a home, irrespective of how shiny it is or how lovely the free coffee tastes!
Typically ‘the list’ could contain items such as the following, based on what is important to you in your new home:
location, sunlight at certain times of day, number of bedrooms, detached or not, in an estate or an individual home, number of family rooms, access to public transport, gas or electrically heated, side access or not, BER rating, size of garden, safe area for kids to play, walking-distance to shops & cafes, space for 2 cars to park, quite street or area, access to sports facilities, single or two story…..etc etc, depending on what you really want to have in or around your home.
The creation of your list is a challenging but a very worthwhile exercise to undertake, as it helps you get clarity on what you REALLY do want in a home. it will help you look past the shiny floors and surfaces and determine if the property you are looking at hits the important aspects for you or not.
It will rarely be that any house ticks ALL of the boxes for you, or if it does you know you may have found your dream home!! But most of us don’t find, or indeed can’t afford the house that might tick all the boxes. In this case it is a matter of prioritising your list and figuring out which features you absolutely will not go without, and which ones you are willing to go without…..then and only then will you be well armed to make a decision on which home is going to potentially be the best fit for you.
Going Too Close To The Bone:
The final pitfall to mention here is the pitfall of being overly-optimistic about the interest rate situation. What I mean by that is that interest rates on mortgages are currently particularly low. If we borrow money today with an agreement to repay it back to the lender over a period of 25 or 30 years, there is a huge level of probability that the rate will increase and decrease over that period of time. There are some ‘experts’ who suggest that interest rates are only going to increase over the coming decades….how they can predict this is anyone’s guess! Irrespective of the accuracy of that prediction many borrowers currently borrow an amount, at the current rates, which will consume 30-40% of their house-hold take-home income. This is a significant portion. Lets have a look at what would happen if rates doubled, and you were on a variable rate mortgage.
For round figures lets assume you are borrowing €250,000 over 25 years, and the current rate of interest is 3%. Currently the repayment on this mortgage would be €1,185 per month. However, if the rate were to jump to 6% what do you think would be the repayment on that mortgage now…..€1,600 per month, which might not seem huge but is another €400 per month. If you are on the higher rate tax band that is the equivalent of earning another €800 per month, or the guts of €10,000 per year salary to cover that increase in mortgage repayment, not to be sniffed at!!
Solution: Yes the banks do their own stress-testing of your ability to repay a mortgage, but that is generally only stress-tested by an additional 1% on the current rates. Rates may never increase, they could indeed do nothing but fall for the next 40 years, nobody actually knows, however it could be wise to be prepared for such an increase. You could do this by borrowing an amount that would be more than manageable even if rates did rocket, or indeed by fixing the rate of interest if you were at all concerned by the impact a potential large rate jump would have. Nobody knows what the best strategy would be…..it is all guess-work when it comes to rates. Evidence of that, an awful lot of those who got a tracker-mortgage back in the day (which in hindsight were a financial god-send to many!) were admittedly just like yer man on the bus in that Financial Regulator advert where he shouts ‘I don’t know what a tracker mortgage is‘…….they had no idea what the rates were going to be but they ended up with really valuable mortgage rate agreements, and good on them!!
We all want a lovely house that ticks all the boxes. In order to get as nice a house as possible we often stretch the amount we borrow. These are natural urges and good luck to you. All we encourage you to do is to consider the above aspects, think ahead a little, know what you want, figure out how much of a rate increase you could manage, and try not let the mortgage be the thing that removes freedom of choice on how you live the rest of your life…….I wish you nothing but well wishes and good luck.
You’re a legend,
QFA | RPA | APA | Qualified Coach
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