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.