The fear of missing out is continuing to fuel the property market. Buying in a heated market can lead to impulsive decisions with negative financial consequences. Here are the top five mistakes people make when borrowing money to buy a house:
Relying on the lender’s analysis of how much you can borrow
The focus of the lender is on whether they are going to get their money back rather than on what is best for you. Applying most of your available financial resources to buying a new home may or may not be the best decision for your long term future even if you are able to afford the repayments.
Ignoring the possibility of rising interest rates
Low interest rates mean low loan repayments and potentially the ability to borrow more. Bear in mind that borrowing up to the maximum you can afford now means that when interest rates eventually increase, loan repayments may become unaffordable.
Not setting aside an emergency fund
If all your spare funds are tied up in the house, there is nothing to come and go on if you get hit with an unexpected expense or a sudden reduction in your income.
Underinsuring your house and yourself
Avoid underinsuring by getting a valuation done for insurance purposes. This is different than a market valuation that might be done at the time of purchase and will take into account additional factors such as landscaping features and demolition costs. Taking on an increased level of debt should also trigger a review of your life and income protection insurance.
Treating your house as an investment
From a strictly financial point of view, it makes sense to live in the lowest value house you feel comfortable living in while building up an investment portfolio, which may include other property.