One of the people at work is buying her first home with her partner and, being the finance nerd I am, we’ve been chatting through each stage of the process. It started with saving the deposit, then getting finance approved and negotiating the price now that they’ve found a property that fits.
And while none of these stages has been especially easy, there are two things we’ve talked about more than anything else: How to approach a counter offer and whether to lock in a fixed rate.
So for anyone else going through the same process, I thought I’d share my advice.
Count on counter offers
A lot of first home buyers are pretty stretched when they hit the well-worn home inspection track. In search of the dream home, this often results in placing bids that are pretty well at the limit of their finances. And when faced with a counter offer, the bidding can quickly become an emotional decision, not a numerical one.
This can be a devastating mistake to make.
It’s easy to think an extra $5,000 is relatively loose change compared to the $500,000 you’re about to spend, but the bank and your wages will say otherwise. At the end of the property hunt, whether for an investment property or somewhere to live in, the mortgage needs to be manageable.
This advice might sound pretty obvious, but the number of people who contact me in trouble after bidding beyond their means just blows me away. As a rule of thumb, mortgage repayments shouldn’t exceed 30 per cent of gross income and an interest rate buffer of at least 2 per cent needs to be factored in for future movements.
As I’ve reiterated to my colleague, the numbers absolutely must work to push the button on another bid. If they don’t, then walk on to the next inspection.
Fixing the interest rate
The reason a lot of people don’t allow for that interest rate buffer and end up in trouble is that they’re able to lock in a great fixed rate now, plug 5 per cent into the mortgage calculator and think they’ll be okay.
Unfortunately it’s not that simple.
After that fixed rate period finishes the loan is subject to whatever the going interest rates are at the time.
While I’m not saying mortgage rates will jump back up there any time soon, the financial world has a knack of returning to long-term averages, so plan on paying higher rates later in the life of your mortgage.
Of course, the basic numbers you crunch must also include costs like council rates, water and maintenance.
As to how much of a loan to fix, I’ve always gone for a bit of both to be safe. Neither fixed nor variable is risk-free as rates always move and your circumstances can quickly change, making one loan more suitable than the other.
The key to making the decision is to do some research, form an opinion on where you believe rates are headed and structure the loan accordingly.
In my opinion, fixed rates won’t go much lower than they are now, unless we stumble badly into recession. Even if the Reserve Bank cuts again this year, as some economists are tipping, it is unlikely fixed rates will be reduced by too much. And trying to pick the bottom of any market is a mug’s game.
As with any financial product it is also crucial to read the fine print and find a loan that fits your circumstances. This way you won’t discover hairy terms down the track or be sitting around wishing you’d done one thing and not the other.
Stay calm and considered
Again, it is crucial you are comfortable with the decision.
It can be very daunting buying your first property, but a very exciting time too, so crunch the numbers, remove the emotion and do the research to make the decision a smart one.
