You have to be careful not to overstretch yourself financially when you're looking to buy a house
If you’re planning on buying a property for the very first time this year, you’re going to part with a serious amount of cash.
Not only will you have to pay at least 10% of the purchase price, there are other costs like legal fees and furnishings. And depending on the property, you may even need money to carry out repairs. Whether you do or don’t, your savings are going to take a serious hit.
Buying a house and taking on a mortgage can affect your quality of life, good and bad, for the years ahead, so getting it right is important.
It’s important to get help, but you also need to do some research and educate yourself as well. To help with this, I am going to share with you some information and advice.
Firstly, make sure you’re in a financially good place after you decide to buy.
What I mean by this is to make sure the mortgage you take on isn’t too much for you.
Your mortgage repayment isn’t the only monthly expense you’ll have once you become a homeowner. You will have additional costs which include life assurance and home insurance premium, property tax, utility bills, and unexpected expenses are also likely to occur.
So, you need to look at your total monthly costs and not just your mortgage repayment. Let me give you a real-life example of this.
I helped arrange a mortgage last year, for a couple who were first time buyers. They borrowed €250,000 over 30 years and their monthly mortgage repayment was €1,158.
On top of that, their life assurance premium was €25 per month (pm); their home insurance cost €36 pm. The property tax worked out at €41 pm. I estimated their heating costs were going to be €59 pm, electricity costs of €71 pm, refuse collection c. €25 pm, and telephone and broadband bills €39 pm. They were also likely to spend on average €50 per month on improvements, additional household purchases and repairs during the year.
The conservative cost of home ownership for them each month was going to be c. €1,504 which was 30% higher than their mortgage repayment. For anyone thinking of buying a property, a good rule of thumb is adding between 25% to 30% of their mortgage repayment, to get the true monthly cost of home ownership.
Buying your first property is very exciting. When Roseann and I were buying our first, nearly every property we viewed we liked and wanted. Walking into any property you begin to imagine what each room will look like, but then you come across a property that is beyond what you had budgeted for, but is incredible.
You can’t stop thinking about it, and sure it’s only €40,000 more than what you said you’d spend and what difference would that amount make to your life? You try to convince yourself and rationalise your reasons for spending more than you had planned.
You begin to promise yourself that things will get better because your income will increase in the future, so you can take the pain for a few years. This is a dangerous strategy because it’s something you have no control over.
Have you ever thought what would happen if your income reduced? What if you or your partner lost your job? You can get caught up in the excitement of buying a property, but you need to consider these things as well.
Being able to repay a mortgage, along with the ability to continue to save, albeit not at the rate you had been at, before your mortgage is important. You need to be able to save a reasonable percentage of your income each month, and build up those savings so if there is an income shock in the future, you are prepared.
Not being able to save and being one month away from being in arrears, if anything happened to your income, is no way to live. So, you need to be able to build that safety net, along with having a life when your mortgage is in place. Scraping by each month is no way to live, and I meet couples all the time who are like this and are miserable.
When you become emotionally involved with a property, you begin making decisions with your heart rather than your head, and that can be dangerous. You overestimate how you will feel once you’ve bought the property. You think the higher priced house will make you feel much happier for much longer than you actually will. So, you really have to think critically and decide if the higher priced house, and the subsequent higher monthly costs that come with it, are worth it?
According to research carried out by the online real estate company, Zillow, the biggest regret of first time buyers (40%) was the cost of their home.
So, to avoid this, it’s likely you’re going to have to make some compromises. Know what your total outgoings will be and what you are comfortable with. Not being able to walk into a fully furnished four-bedroom, two-bathroom property in a great area is something you should be prepared for and accept.
However, that doesn’t mean you buy any old property either just because it’s under budget. You may have to sacrifice space for location, or price for layout, or age for house type or a property ready to move into or a fixer-upper.
To help with this, you need to rank in order of importance what you absolutely want from your new home, and what your red line areas are, and that’s your starting point when you go house hunting.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie