As we finally approach spring, many people will be thinking about moving house or trying get on the housing ladder for the first time.
Recent trends indicate that younger generations are postponing their leap into the housing market. Factors such as mounting student loan debt, delayed marriages, escalating rental expenses, and the choice to reside with parents longer are contributing to this.
While delaying the purchase of a home allows time for financial preparation, it’s essential to avoid certain common money mistakes that can impede progress.
Below, Magenta has identified 7 common money mistakes to avoid before you buy a home, be it your first home or a larger family home:
Don’t expect to get a big return
If someone asks why you want to buy a house and your first answer is something along the lines of “Because I’m wasting money on rent,” or “Because it’s a good investment,” you might not be mentally prepared for all the responsibilities that come with home ownership.
Property is rarely a simple way of making money and although there are pockets of significant growth in certain parts of the country, if you take away extra costs plus inflation, you’re not going to make any money on an average family home.
You should think of buying a home, not an investment and we think it is smarter to look for an affordable house that meets non-monetary goals i.e. it’s in a good neighbourhood or it’s a good place to start a family, than it is to worry about whether it will increase in value.
Don’t combine too many life events at once
New beginnings are great, but combining too many life events at once can quickly derail your finances.
If you are thinking of getting married, adopting a puppy, having a baby, and buying a house all in the same year – watch out! Each of these comes with unexpected costs that can eat up your savings if you are not careful.
Working toward your financial goals takes time and should happen at your pace, not at a time when it seems like it should happen or because everyone else is doing it.
Don’t use emergency savings for a deposit
When it comes to buying a home, the more you have in savings, the better. But the money you’re putting away for a deposit should remain separate from your emergency fund, which should be 3-9 months of normal expenses set aside in case something goes wrong.
No matter how well you plan or how positively you think, there are always things out of your control that can go wrong and having a cash safety net is essential.
It is best to keep your house deposit savings somewhere safe and liquid, particularly if you’re looking to purchase in the next 3 years.
Do NOT invest your deposit in the stock market
Investing the money you’re saving for a deposit might seem like a good idea, especially if you’re trying to reach your goal in a short time frame. But we do not believe this to be a risk worth taking.
You should keep this money in cash, even when interest rates are low – you’re better off having safety and liquidity and seeing yourself making progress every month than worrying about stock market volatility and losing sleep over your funds.
Make sure you work consistently
If you need a mortgage to buy your first home, (which most people do,) you will need to provide evidence of your income and a reasonable employment/self-employment history to satisfy any lender.
Even if you are thinking of setting up your own business in the future, make sure you get your timing right and either apply for a loan while still fully employed or wait until you have some evidence of your new business earnings bearing in mind that most lenders will want 3 year’s accounts.
Don’t have too much outstanding debt
When you apply for a mortgage, the interest rate for paying back the loan as well as the amount you can borrow, will depend to some extent on your credit history. If you have significant outstanding debt, this and your credit rating might count against you.
As you will be having a mortgage loan for a long time (for most people around 25 years,) it makes sense to get the best possible deal.
In any event, you don’t want to load a big mortgage debt on top of other debt, so try to repay as much as you can before applying for your mortgage.
Don’t miscalculate how much you can afford
Before you start thinking about kitchen appliances and how many bedrooms you need, it’s important to determine how much mortgage you can reasonably afford, especially if interest rates rise in the future.
On top of the mortgage payment, you’ll also have council tax, insurance, utility costs, and ongoing repairs and maintenance, so you need to calculate the real monthly cost of homeownership before committing.
Well-intentioned friends and family may push you to spend outside of your comfort zone but the best approach is to do some research and simple calculations based on your own financial situation.
As a guide, if you limit your monthly mortgage payment to around 30% of post-tax income, then you’ll have more money to put toward other financial goals and fun purchases, like travel and dining out.
If you have student loans or other debt, you may want to limit your mortgage payment even further if you can, such as 20% of post-tax income so you can concentrate on becoming debt-free as soon as possible.
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