Buying a home is one of the most important and biggest decisions you will ever make in your life. A new home is everyone’s dream, providing that solid foundation for your family, and in the long run it gives financial stability.
A home generally increases your net worth and takes you a step closer to achieving financial freedom. However, if you buy a home that is way beyond your means, the dream can quickly turn into your worst nightmare. Here are key signs that you cannot afford that home.
IT IS WAY ABOVE YOUR BUDGET
As obvious as this is, an amazing house might tempt you to go above your budget. It is important to understand the implications of buying something that is beyond your budget. The whole point of a budget is to keep you in check! Stick to it.
You can determine a healthy budget by calculating your current income and expenses on a monthly budget. Add in important factors such as inflation. It is also important to consider other expenses such as savings and investments. When looking at future mortgage payments, any figure higher than your set budget can place a huge strain on your pocket. If you really want that home, hold out a little while longer until your income improves, or be a little patient and hunt for a house that is within your means.
YOU CANNOT PUT 20PC DOWN
There are a number of advantages of putting a considerable down payment for a home. The more you put down, the less you have to borrow to finish paying for the home. Putting in more money means less interest payments. If you fail to place 20 per cent down of the total value of the home, lenders will require you to purchase private mortgage insurance, which is an added cost to your loan. Consider saving a little bit more to afford a larger down payment.
YOUR INTEREST RATE IS TOO HIGH
Following the interest rate cap, lenders are obliged to charge clients no more than 13.5 per cent on interest. However, policy makers are in the process of reviewing this, and are leaning towards adapting a risk-based premium, meaning clients will be issued loans according to their risk profile. If this goes through then it means you could end up paying higher rates if banks think you are a risky borrower. Typically, banks profile your risk level by analysing your current debt level, credit score and history, and if they think you are a risky borrower, they hike up interest, meaning your monthly mortgage will be much higher. Make sure your financial health is tiptop, your records with banks are clean, and do bit of shopping around with banks before settling on one scheme. Also, your negotiating skills can come in handy in getting your interest rate revised down.
YOUR MOTIVES ARE ALL WRONG
What is guiding your decision to buy a house? Is it guided by your financial standing? Or could it be guided by emotive factors such as societal pressure to be in a certain suburb, or neighbourhood? Is having that ‘perfect’ house, with the ‘perfect garden’, driving you? Is it expensive but it’s your dream home? Well, your dream home can quickly turn out to be your nightmare if you allow your emotions to get the best of you. Ultimately, buying a new home should be a financial decision, which makes economic sense based on your current financial position. It’s perfectly fine to set a standard for what you want, however, make sure you are rational and honest about whether you actually can afford that home. Also set standards for yourself, and do not be swayed by societal pressure to meet unrealistic expectations.
DROWNING IN DEBT
If your debt is high, home ownership probably would not be the best thing for you right now. As we discussed earlier, when applying for a mortgage, lenders will consider small credit card debt, to student loans and the rest. If your debt combined exceeds more than 43 per cent of your income, your debt to income ratio is way too high and you simply cannot afford a new home.
WHEN TO BORROW FROM OTHER ACCOUNTS
If you find yourself borrowing from retirement accounts, emergency savings, or any other funds that were kept aside for anything other than buying a new home, it follows that you cannot afford a new house. Remember that you put aside savings for a special purpose, and so those savings need to stay in tact for those functions. If you take funds out of these accounts you risk not meeting your other financial goals and at the end, you will find yourself in a big fat mess.
Yes, cold feet are common when making life-altering decisions, however, if you cannot shake those nerves, then pay attention to them. Oftentimes, we have that gut feeling, that tells us something is not right! Do not ignore that feeling! Listen to it! It probably is a sign that you are walking down the wrong path.
– MAYA HAYAKAWA