6 things to consider before buying a home.
Although I am proud to say that we are now mortgage free - to be honest we were relatively clueless when we bought our house back in 2014. We didn’t have an emergency fund (I didn’t even know what that was at the time!) and were extremely lucky that we didn’t loose our jobs in the first couple of years. We made the leap into home ownership quite quickly and there were many things that we didn’t take into account before we purchased.
An important question to ask is ‘Is this the right time for me?’ There is a lot of pressure especially in NZ from parents and society in general to buy a house asap and that you should ‘get on the ladder’ before you are priced out (we got caught up in this ourselves!). However before purchasing you may want to contemplate the following:
1/ Lifestyle
How long can you see yourself living there? Selling and buying is an expensive process so you don’t want to be caught selling after a couple of years because you realize that you actually want to live overseas or that the house only suits your needs for a year, especially given that there is a higher chance that the house won’t have increased in value or may even decrease in value if you are selling up after a short period of time
Do you actually want to live in the neighborhood and type of house that you can afford or do you enjoy the lifestyle that renting gives you?
If you are buying with someone else can you see yourself with that person long term? Have you agreed what would happen with the house if you were to break up?
2/ Current financial situation
Do you have a fully stocked emergency fund of 3-6 months? This would be on top of your house deposit. Ideally you may want to account for 3-6 months of expenses based on your expenses as a home owner, rather than what they are now.
Do you have debt? One of the best decisions we made was to become debt free prior to committing to our mortgage (including student loan). Although I understand from a numbers point of view if the student loan is interest free (which it is in NZ at the moment), it meant that we had our full incomes to save towards renovations, pay for any unexpected costs and tackle extra repayments on our mortgage.
3/ One off costs relating to the purchase
Valuations - also keep in mind that you might have to pay for valuations for properties that you might not even end up buying!
Building reports - as for valuations if you are going to an auction you may be spending money on reports that don’t eventuate in a purchase
Legal fees
Bank and lender fees
LIM report
4/ Ongoing costs of being a home owner
Council rates and Insurance (and consider that this usually increases in price each year!)
Hardware store - when we first bought our house we were easily spending around $300-$500 per month at Mitre 10. We made a conscious effort to stop after a while as it was a lot of money for us at the time. It seems that after discussions with many of our home owner friends that this is quite a common phenomenon.
Maintenance - general guidelines say you should allow for around 1-3% of your purchase price on an annual basis. Note that there are very large costs that don’t occur that often that most people forget to save for such as replacing a roof, painting the exterior of a house and repairing or replacing retaining walls which are all very costly! We personally have a sinking fund that we put money into each month to save towards general maintenance costs as well as diverting larger saving amounts for upcoming items that we are planning for.
Body corporate levies (if you are part of a BC). Make sure you do some further research on this. I know people who have been caught out with large one off levies on top of usual fees (i.e. over $50k in one year).
Renovations - our to do list tends to grow bigger each year. Many people will take out additional loans to carry out their renovations however we have only ever carried out works with cash. Otherwise your mortgage will grow bigger instead of getting smaller and spending money that you have had to work for and save up for in advance will make you more mindful and intentional when deciding on what project/s to tackle.
Furniture, homeware, whiteware - if you are anything like me owning your own home will kick in your nesting instincts and suddenly there will be a large list of ‘must have’ items. Most people forget to account for these and sometimes end up taking up buy now pay later options or getting a larger mortgage to pay for these. It is best to decide on your boundaries and own rules around this prior to purchasing a home. For example, we personally agreed that we would always save up in advance and pay cash for what we wanted to buy. We also decided that we would save up longer to buy something of quality that we would keep for the long term, rather than buying cheap items that we would want to replace after a couple
of years.
5/ To use kiwisaver or not?
As at the time of writing this you may be able to withdraw most of your Kiwisaver and use this towards your first home as long as you have been a member for at least 3 years. The key in deciding whether to use this option or not would be to understand the affects on your retirement savings if you were to use your Kiwisaver and make sure that you have your kiwisaver in the correct fund based on your decision. If you decide to use your Kiwisaver then make sure you understand exactly how much can be used and how the process will work (i.e. can it be used towards your deposit or only towards settlement?).
6/ Mortgage
Consider whether you really need to take the maximum amount that the bank is willing to lend you. Most people automatically take the highest number they are offered, however when we were going through the process of buying our house we realized that if we did go for the amount that the bank offered us (which was around $200k more than what we ended up borrowing) we would be stretched so thin that:
we could not afford to furnish our home without using debt
if interest rates went up we would have no extra money to spend on lifestyle items (going out to eat, holidays, etc)
Consider if you can still service your mortgage and live a life that you love if the interest rates go up substantially (which at the moment of writing is applicable to a lot of home owners in NZ).
I hope the above will help you take more time into looking at whether home ownership is the right path for you at the moment and make a more informed and intentional choice.
Photo by Derick McKinney on Unsplash
Disclaimer: The above is by no means a comprehensive account of everything that you need to think about before buying a home, but simply things that I wished I had thought of before we purchased our first home or things that we applied ourselves that in hindsight served us well in the long run. As always my posts are for entertainment and education purposes only and is not to be taken as financial advice.