Everywhere I turn it seems like renting 20 and 30 somethings are talking about buying a house; it seems like people are of the opinion that rent is going to soar as less people get on the housing market, and there are “deals” to be had. During various train journeys for work over the last two weeks, I did a lot of thinking about this and thought I’d post my thoughts on what to be weary of when buying a home and how you would know if you are ready to actually commit to the biggest financial undertaking of your life.
My first concern is the fact that we don’t know where house prices are headed. Stretching yourself now thinking prices are lower than a year ago, might seem like perfect sense, but what if they drop 10, 15 or 20% could you really cope with being in negative equity? Now, negative equity, while not ideal, is not so much of an issue if you don’t need to move. If you have savings behind you, you could cope with job loss, have no plans to move etc, then you can usually ride out negative equity and sell once things pick up. The problem is that many people in their 20′s and 30′s are not at an age or stage in their lives when they will be in one place for the next 5 or 10 years. Many have no savings, no emergency fund and are still single, thus relying on one income. One income plus job loss = disaster!
My other concern is that many of these deals are meant to make you act now and think later. You can’t afford that new 2 bed flat, no worries you can buy 75% of the value and just pay us the other 25% in the next 10 years. You can’t afford a deposit, no worries their own mortgage specialist will get you a 95% mortgage and they will contribute the rest. I’ve always believed that no company gives anything away for free, there is usually a reason why they are helping you out. Is the home in a mixed block? Is the development not selling well? Are the companies mortgage rates higher to compensate for that 5% they’re putting towards the deposit for you? And one thing I keep wondering about is this, will people actually want shared equity homes in 5 or 10 years time?
Out of interest, I telephoned two major builders today to ask about deals they were advertising. Both told me that the deals were over this weekend and I better act fast because these were the best deals possible and I was about to miss out. Both developments apparently only had 1 flat left and it will be gone this weekend. I plan to ring next week and just see how accurate their “sales pitch” was.
Now, some people may be ready to think about purchasing a home, so, I thought I’d share my list of what would be the ideal before making that big step
1. Check out the neighbourhood, look at the community profile, find out what type of housing is going up & where. An area near me told home buyers that the affordable housing within the new development was going to be NHS workers housing. Nothing was written in contract, by the time the housing was ready and people moved in, the buyers found out it was actually council housing (no problem with that in theory!) but several very problematic families fresh out of HMP (jail for you North Americans!) were being placed there and lets just say that after many high profile incidents, many home owners lost £50K off the value of their homes within 2 weeks. New communities that have boarded up houses on the end of your street and pictures in the paper don’t retain their value too well!
2. Be realistic about what bills you face. Plonkee did a good post about what her bills are each month. She had more than me because as a home owner, insurance was very important. Don’t forget that you will be on your own paying bills (even if you plan to rent out a room, there is no guarantee of a tenant!); look at your budget accordingly.
3. Emergency Fund – the problem with home ownership is that you can’t get out easily. At a bare minimum you should expect it to take 3 months and right now that would be with a lot of luck on your side! It is more realistic to think it would take 6 months + especially in the case of single people or families with 1 income. If you had to sell asap, do you have enough money in your savings account to pay for even 3 months of mortgage payments plus bills plus lawyers and estate agent fees? Personally, ideally, before I am next a homeowner, I’d like to ensure I have 6 months expenses saved for the possibility of job loss & a mini emergency fund to cover the day to day emergencies. Experts say you should have 1-3% of the value of your home in a home fund, for unexpected major repairs.
4. Deposit – When you have no deposit or a small deposit, it means you will have to pay significantly more interest on your mortgage and you will have fewer mortgage companies that are willing to loan to you. This will cost you financially in the long run. Be realistic and work hard. I would say at a minimum you want 10% downpayment, but if you can squeeze that (through frugal living, selling belongings, working an extra job!) to 15% that gives you wiggle room both in respect to the possibility of the market going down and mortgage deals.
5. Be realistic – most people want their mortgages paid off as soon as possible. This makes a lot of sense, the longer it takes the more interest you pay. However, locking yourself into higher payments so you can pay it off in 10 years instead of 20 is smart if you can look into a crystal ball and see your future! Since I don’t have those powers I would need to take a balanced approach. For me, I would be finding a rate and time frame that allowed for comfortable payments with the option of overpaying each month/year. I would then set up a goal to overpay each month, even by £100.
6. Gone are the days where you can purchase a property, sit on it and sell it a year later for a profit. This means you need to be very honest about your situation. Are you staying in that city/county/country? Is your job secure? Is your relationship secure? What would you do if you split up? Could you afford to carry the mortgage payments on your own? Are you someone who wants to work abroad? Do you plan to have children? These are all very important questions before you even think about purchasing a property.
So, if I were to want to purchase a property at £175,000 (BTW this isn’t even possible in London!) by my own “staying safe” calculations I would want the following:
£10,000 in my emergency fund (for job loss) = 6 months expenses
£3500 in a home emergency fund (2% of the value of the home) for furnace, roof, etc.
£1000 for lawyers fees
£17,500 – £25,000 down-payment (this is 10-15% of the value of the home)
Total £32, 000 – £37,500
I’ll end with this…a friend bought a flat for £175,000, the same cost as my calculations above. She told me recently that she got her deposit for free from a builder. I just worked out she will pay more than £50,000 more on her mortgage because of that deposit. Suddenly it seems a lot wiser to have waited until she had that £17,500-£25,000 down-payment saved.
Good math, I think you are so right to create a buffer. Mind you rental might go a bit steep again.
Gosh I’d never really thought of all that. you are right about deposits and not getting carried away with what you own. Too many people overstretch themselves.
On the white front – there is always a white to suit. Try ivory or a pale cream!
Great post.
Hubby and I bought the condo we had been living in from my in laws. To all people who say don’t get involved with family with money it’s true. We got a good deal but now there are strings attached. Strings that have to actual documented backup they can act upon but is partially responsible for a strain between us and we have not spoken to my husbands parents in a year.
If I had it to do over again I would not have bought this place but moved on.
There’s so much pressure to buy a house for a lot of people, that I’m not sure most even stop to consider the carrying costs, lawyers fees, insurance, taxes, etc. that come along with said house. I’d love a house, but I’m not willing to dump everything I have into a property until I have the funds behind me. It would terrify me to imagine that I might be homeless if I suddenly couldn’t afford the mortgage or to pay the electricity bill…
At least the Canadian gov’t/banks have done away with the ‘no money down’ mortgage!!
A brilliant post Frugal.
As for checking out the neighbourhood – make sure you visit it during the daytime and in the evening too.
Developers offering to pay the deposit have often overvalued the property and, when it comes to getting a mortgage, the mortgage company’s valuation may not back up that of the developer’s. (This happened in step son’s case). It was just a “hook in”. As a result the difference had to be paid anyway.
Hi there-a very good post and I can totally empathise with you, living just outside London, I know how steep prices are, even with the housing market down too. I live in shared ownership-50% mortgage, 50% rent through East Thames Housing Association? Have you looked at this scenario for yourself? At the moment, we don’t intend to buy the other half as we are happy as we are. My view is that a house is a home, regardless of it being rented or bought-who knows what can happen in the future? many elderly people have to sell their homes to go into care homes, so although owning is great if you can afford it, I don’t believe it is the be all and end all!! If you want East Thames details, let me know!!
Hind sight is a great thing and we would have moved into rented had we known the housing market would go as it has done.
This could have meant we could have moved to Devon earlier and had a greater choice of properties and possibly got a good deal. That aside, we are where we are and we’ll make the best of it.
Neighbors are such a biggie for me and it’s so difficult to tell, but it’s a total deal breaker for me if the area / neighbors look a nightmare
Good post Frugal!
We rent and although we’d like to change that in the future, we are happy at the moment.
Since before we got married we’ve had people questioning why we are renting and telling us that renting is ‘throwing away money’ but we’ve seen the housing crash coming for a while now.
The truth is we are in an area we love, we have great neighbours, a good landlord and our rent is around a third less than other properties in the area and I should think around half of what a mortgage would cost us.
What annoys me is that people who have mortgages feel they have the right to question our choices! (i have specific people in mind here) And why should we have to explain why we’ve chosen to rent? (sorry turning into a rant now!)
I have noticed now though that a lot of the people who were doing this questioning have quietened down now! (And one couple have separated, sold their house and are living in separate rented properties).
Our kids are going to wait and see how the housing market goes, in the meantime they are sorting out their finances. You are quite right it is not something to be taken on lightly and having an emergency fund in these days is now essential.
I have just been checking out the link to my blog that comes up with a comment. Really strange it works on the earlier comments I have made but not on the last one. Trying again just to check!
If not the address is http://www.catzscorner.blogspot.com/
Fingers crossed it works!
Excellent post – thank you. Having had some truly revolting (and noisy) neighbours in the past, my biggest consideration when moving anywhere would be what the neighbours / noise / nuisance factor would be. I’d be checking out the area morning, noon and night – week days and weekends.
As for negative equity – well, it’s a real risk at the moment but in a few years time it is inevitable that prices will rise once again. My theory is you can NEVER lose on buying property as long as you are prepared / able to choose the right time to sell.
What a useful post. I’m sure there are lots of young people who go head first into the propery market (I did, donkey’s years ago and lost a considerable amount of money). If my daughter ever starts talking about buying her own place, I shall point her in your direction.
What a great blog, happy to have found it.
Sorry to be a bit off-topic here, but I was contacted by a blogger(http://www.becomingdomestic.co.uk) who has you on her blog roll. which is how I found you.
I’m an author and she wrote to thank me for writing a book I had written called ‘A Place in My Country: In Search of a Rural Dream’.
This is what Becoming Domestic wrote in her email to me:
“I found your book in our local library and have enjoyed it tremendously.
Your story and those of your friends in Marsham is told so well. Before reading it I was concerned with leaving behind the final trappings of modern
life which may not be accessible in Cornwall but now realize I have so much to take their place.
I’m buying a copy of your book for my husband I know he’ll enjoy it as much as me.
Thanks for writing it.”
I hope you don’t mind but I thought it might therefore appeal to you too, as she has you on her blogroll.
Here’s the Amazon reference but it is published by Phoenix in paperback and was published by Weidenfeld & Nicholson last year.
http://www.amazon.co.uk/Place-My-Country-Search-Rural/dp/0753823888/ref=pd_sbs_b_title_14
If your blog has heaps of traffic I may even be able to get my publisher to send you a free copy if you tell them that you will review and blog about it, but they are rather mean when it comes to bloggers! (Why is beyond me.)
Anyway, there it is. Again, hope you don’t object to this shameless self-promotion.
Kind regards,
Ian
http://www.ianwalthew.com
P.S You might also be interested in a hobby of mine: http://www.farmblogs.blogspot.com
you’re back! hooray! we missed you
glad to hear things are looking up. As a 20-something, I feel like the last person in my group that hasn’t bought a house. I think you are doing really well to give the sobering reminder that the right time isn’t when the market says it’s the right time- because those “savings” are really only “savings” if you are in a financial position to for such an undertaking. Otherwise, it’s just a way to end up paying more mortgage!!!
I have heard that some mortgages don’t let you overpay, is that really the case? It would make sense, they would want to collect a maximum interest. But it seems predatory indeed. Something to look out for when the time finally comes for us (we don’t think it will be for another five years- all our friends will have owned for ten years by then. but we will actually own our home, not owe someone money for it! )
Neiman – thanks for hte nice comments! I think you are wise re the house!
Re overpaying, yes some don’t, but most allow you to pay of 10% extra per year!
Thanks Sharon, I’d be honored to have your daughter read!
My Life Makeover Journey – sounds like you are very sensible! Ignore those friends!
Fashion Addict Rehab – I agree sadly…..!
This is a great post. I’ve been turning around the idea of home ownership a lot for the past few months and continue to waver instead of buy. Its such a difficult decision – especially when you factor in how owning a home ties you down in a way nothing else does.
This is nice collection of helpful advice. Thank you so much for sharing this tips.Keep in mind that there’s a lot of real estate agents who can help us when it comes to buying properties.
-Audrey