Buying a house is one of life’s biggest financial decisions but it’s also filled with many hidden and costly traps.
One of the biggest traps comes with outsourcing and often that involves using a mortgage broker who offers potential buyers the maximum loan possible. It’s only after the contract is signed and they move in that people start working the numbers. Then the money struggle begins.
Home ownership is a risk. Risk is not necessarily a bad thing: if you don’t take some risks in life, nothing changes. Your wealth will not grow.
But financial risks must be calculated. And they must include a strategy. To ensure your decision to buy a house doesn’t damage your wealth, you must:
Know what you want your future to be
Buying a house is a long-term decision. It determines what you can and cannot do over a long period.
It can impact your ability to invest in shares or property, whether you can send your children to private school, and whether you can afford to salary sacrifice more into your superannuation fund.
Ultimately, buying a house can impact your ability to become self-funded at retirement.
Many retirees are asset rich and live in expensive homes in prestigious suburbs. Yet they are cash poor and survive on the pension.
Could you live on $22,542 per single, or $33,982 per couple, for 20 or 30 years?
Ensure you decide on a house that fits in with your goals and allows you to thrive in retirement, not merely survive.
Remember the extra costs
Take stock of all the extra costs home ownership entails such as council rates, water, electricity, building repairs, maintenance and even strata fees if applicable.
It’s easy to overlook these costs. Renters wanting to buy their first home are particularly susceptible.
Renters often compare the rent they’ve been paying with mortgage repayments and are happy to see there isn’t much difference.
Yet they fail to budget for the expenses usually paid for by their landlord. Once they buy their home and the bills start rolling in, they struggle to keep up. They often cover the extra costs by using their credit card – which lands them in more debt.
Work out your money context
To ensure you settle on a property that fits your budget, you need to understand your money context.
Your money context is your unique financial position. It is the combination of your income, expenses, responsibilities, goals and values.
To gain a full understanding of your money context, you need to work with an accountant or financial planner.
You can also see how your decision to buy a house will impact your cash flow, tax position and family budget by asking yourself these questions:
- How will the monthly mortgage repayments restrict my budget?
- Will I be able to afford utilities, maintenance and council rates on top of the repayments?
- Am I prepared to pay the loan over the next 30 years?
- To reduce the loan to 20 years, how much would I need to increase the repayments by?
- Could I afford to invest in other assets while paying off the loan?
- What if interest rates rise another 2 per cent? Would I have a cash-flow buffer to manage the increase?
- Do I have an emergency savings account in case the property needed urgent repairs?
- When would I need to renovate the property? Would I have cash set aside for home improvements, or would I need to refinance?
- What if I stayed in rented accommodation and bought investment properties based on a strategic financial plan? What would the tax and cash-flow consequences be?
Being too financially cautious will fail to grow your nest egg. But putting all your eggs into one basket won’t help, either.
You need a middle ground – a calculated risk, using your numbers to work out your strategy – to ensure you don’t hit financial trouble.
