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Home Buying Mistakes

Home Buying Mistakes

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.

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Home Buyers Beware

Caution2Home Buyers Beware

New Zealand has a high rate of home ownership when compared to other countries, although it is falling. More properties are now owned by fewer people and property investors are becoming more influential in the market. Owning property can be a good way to create wealth as the value of property increases over the long term, however in the short term, property prices can fluctuate. The key drivers of property prices are interest rates, population changes (particularly from net migration) and the supply of housing. Other factors such as building costs and bank lending policies can also be important. Getting onto the property ladder can be a risky process. First homes are usually bought with a small deposit and a large mortgage at a time of life when income is low and uncertain. The key risks faced by first time buyers are the risk that interest rates will rise, thus increasing mortgage repayments, the risk that income will drop due to loss of a job or the birth of a child, and the risk of having to sell the property due to financial hardship at a time when property prices are falling. Right now, there are significant medium term risks for first home buyers. Interest rates are low and may fall, property prices are high, investors are very active in the market, and in some areas there is a shortage of properties. This is a dangerous combination. First home buyers who buy now face the risks that interest rates will rise, investors will pull back due to the high cost of borrowing, and the supply of houses may increase beyond the level of demand. Buyers who borrow cheaply now but do not factor in higher interest costs in the medium term may be forced to sell in a falling market.

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