March 9th 2009
by Neil Jenman.
You're a first homebuyer. You're excited - and why wouldn't you be; interest rates at record lows, Kevin Rudd giving you $14,000 ($21,000 for a new home), the state government (depending on where you live) is offering you presents such as free stamp duty or another few thousand dollars to help you in the door.
Yes, it's a good time to be a first home buyer - at least in terms of freebies and interest rates. However, prices compared with wages are at record highs, so it's not the best time. But, still, it is a good time, to be sure.
But, please, in all your excitement and enthusiasm, make time to think of something you may be tempted to neglect - the future.
The seeds of the future are sown in the actions of today. By considering carefully what you are doing now you can avoid a disaster that is certain to hit thousands of today's homebuyers.
Here's the danger. Because of today's low interest rates, high debt doesn't seem dangerous. And that could mean disaster in the years ahead when (not if) interest rates go back up.
Think carefully about this: A year ago, when interest rates were up around nine per cent, a common loan for first homebuyers was $300,000. The monthly repayment on that loan was around $2,500.
Today, of course, with interest rates around five per cent, that monthly repayment is a lot less. But, instead of rejoicing in a lower payment, many buyers coming into the market are rejoicing at how much extra they can borrow for the same repayment.
They're saying such things as, "We can afford $2,500 a month which means we can now borrow $450,000. Wow, that's an extra $150,000 at no extra payment."
So, a bigger house or a better area, all at the same monthly repayment. Yes, but with a staggering 50 per cent more debt.
Today, to a starry-eyed newly married couple, both working, both on good salaries, with no children, times are about as perfect as can be. Happy and in love and ready to buy. It's as good as it gets - or is ever likely to be if they do what many couples are doing. Diving into the debt pool.
Yes, before they celebrate a year since they kissed at the wedding, this couple are going to be lip deep in debt.
Now, here's a peek into the future (somewhere between two and five years from now). There's a new member of the family (or two). Instead of two incomes, there's only one. Instead of the costs of feeding and clothing two people, there's now the cost of three or four people. Oh, and those interest rates have now gone back up. By four per cent.
So, instead of paying $2,500 a month the repayments are now more than $3,500 a month.
Do you know what you have now? Stress. Well, to be precise, unless the main breadwinner is earning an annual salary of more than $140,000, you are officially suffering mortgage stress.
Today the average Australian wage is about $59,000. After tax, there is not enough money left to pay the cost of the average city dweller mortgage if interest rates go back to where they were just a year ago.
Of course this is not going to happen in the next 12 months. Maybe not in the next two years. And, by the time interest rates go back up again, the average wage will be higher.
But how much of a financial 'buffer' will you give yourself if you put yourselves lip deep in debt today? Very little.
At the risk of spoiling your newly married party-time, I have to tell you about a question I really believe you need to answer before you commit yourself to a mortgage. It's a nine-word question and it's probably the most important question of your financial life. It enables you to see what will happen in the event of a bleak future.
Here it is: What is the worst that can happen to us?
Go on, try it. Be the doomsayers just for an hour or so.
Think about what will happen if one of you loses a job. If you have a baby. Yes, there's always the cruelty (according to some child psychologists) of child care centres (which are not cheap).
What will happen if you have to take a pay cut to get another job?
What other expenses could come along?
Trust me, owning a home comes with a lot of expenses you never thought existed - just ask any current homeowner.
To be sure, buying a home can be a wonderful experience. But the most important factor in buying your own home is "affordability". Buy what you can comfortably afford. Buy what you need not what you want. If you put your wants before your needs, you're likely to find yourself very needy in the years ahead.
Trust me, buy the cheapest home in a not-so-expensive area. And then work very hard - while you are young and healthy - to pay it off. The day you make the last payment on your own home will be one of the best days of your life. It's an experience you've got to feel.
Today's first-time buyers have got the advantage of lots of government goodies. They've got the luxury of low interest rates. And, in many areas, you can still buy a first home for less than $300,000. So, unless you are certain that you are going to have a salary of around $150,000 in a few years from now, don't take on a mortgage of more than $300,000.
It's lovely to start life deeply in love. But not deeply in debt. Debt will strain love to breaking point.
Don't put yourself lip-deep into debt.
It's bad enough starting life waist-deep in debt. Work hard and, in few years, you'll only be knee-deep in debt. Soon afterwards you'll be debt free.
And you'll then be a genuine home owner, not a debt laden stressed out home loan re-payer.