There has been recent discussion in the media around whether or not we are setting ourselves up for a sub-prime mortgage crisis like the one which occurred in the US. It was this crisis which ultimately caused the Global Financial Crisis.
To what extent this doomsday scenario has validity is up for debate. Certainly the apparent continued ease of available credit relating to home purchases and the increase of more aggressive promotion of low deposit loans is a little worrying.
An article from the Australian Financial Review dated Monday 14 July titled “The $2500 house deposit – high risk mortgages return’ raises some key concerns (although manages to miss others). It is certainly worth a read. The danger is the appeal of low deposit loans reaches out to those who are least able to afford what they are borrowing. The voice for the counter argument is far quieter than the megaphone used to tell us all, “‘we must own our own houses!”
For me, the starting point is to think seriously about whether or not you really have to own the accommodation you live in. Although I don’t agree with it, I accept that in Australia the concept of long- term renting is frowned upon. Also, there are key differences to countries like Germany where long term rentals are the norm. With all that said, it is possible to rent comfortable, suitable accommodation over an extended period and make great strides towards your long term financial security.
If you feel there is no alternative to buying, then consider three key points:
1. Be realistic about what you can afford.
It doesn’t mean in relation to what you have saved as a lump sum deposit, and certainly not what the lenders are willing to loan you.
Work it out on the basis of what you can reasonably afford to pay each month or each fortnight, with a target of having the loan repaid much faster than the 30 year term, and without sacrificing all aspects of your lifestyle.
It might be reasonable to cut back on a few dinners out or have one less holiday each year, but if it gets right down to counting every last cent then you may have over committed. The appeal of owning your own bricks and mortar will wear off pretty quickly if you end up feeling trapped indoors all the time because you can’t even enjoy some simple pleasures.
2. Set your own time lines.
Just because it seems everybody else is doing it doesn’t mean you have to – at least, not as soon as they are.
Constantly being told, “Property always goes up” (which it doesn’t) or feeling like you are being left behind because friends are buying houses; or even having parents tell you, “The sooner you get on the ladder the better,” is really unhelpful.
We don’t always know the financial ins and outs of our friends or the specifics of our nearest and dearest. We can all think of some people in our lives who seem to live a fantastic lifestyle, but we question how they can afford it. Typically a lot of ‘bad’ debt has been accrued, which only serves to be a huge barrier to genuine, long-term wealth creation.
Buy when you are able, not when others think you should, and buy something you can see yourself in for the long term. This is for a simple reason: stamp duty. People constantly say, ‘”Rent money is dead money.” No, it’s not, particularly if you are able to make sensible use of the difference you pay in rent versus what you would contribute to a mortgage. True dead money is paying three lots of stamp duty in ten years as you move from an apartment to a small house to a family home or to a new area in which you would rather live ‘now you can afford it’.
3. Loan Product.
Simply, it is not all about the interest rate. If you establish a loan purely based on interest rate you will be forever chopping and changing – rate shopping on a frequent basis.
It is far more valuable to get the right loan from the outset which dovetails to your long term investment strategy, and enables you to repay the mortgage as fast as is practicably possible. You will end up with a far simpler and more cost effective banking structure over all.
By Gareth Daniels
Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Past performance is not a reliable guide to future returns.