Anyone who has ever borrowed money to buy a car knows the initial excitement. You take delivery and you feel you could drive forever. It’s exhilarating, almost intoxicating. But in our drunken desire for possessions it is easy to forget the debt hangover that follows. Within a few months, the glamour of the purchase is replaced by the grind of the payments. Delight turns to depression.
And so too with home-buying. In the excitement of getting what you want, it’s hard to see any danger ahead. This is especially true if – as is happening at the moment – the people who make money when you buy, the real estate agents, are urging you to buy, patting you on the back and saying “You’ll be right.” As any salesperson knows, it is easy to sell someone something they want. Everyone wants a nice home and every real estate agent wants to sell homes. And so, when the Reserve Bank issues a warning to homebuyers to be careful about overcommitting themselves, the real estate industry is quick to issue its own statements that all is well and that things have never been better. Out come all the old lines about it being the best time to buy because interest rates have never been lower. Yes, and prices have never been higher. Ten years ago, when interest rates were more than twice what they are today, most home prices were less than half what they are today.
In our politically correct society, it’s getting harder to ask the hard questions, the questions we used to ask, the questions which would keep us safe in the future – questions such as what will happen to young couples who buy homes based on two incomes and then, when they have children, they lose one of their incomes? How will they make those payments? Okay, so they will delay starting a family. For how long? The standard answers to such unpopular questions are often vague, such as “someday” or “when we can afford it”. Oh yes, and when will that be? How many couples these days have the discipline – let alone the desire – to make sure they get their financial life in order so that their personal lives are happy? There seems to be a feeling that the more money we can borrow, the better the home we can buy and the happier we will be. This is one of life’s most dangerous mistakes. As many buyers discover, after they have bought their homes, it’s not the size of the home that affects their happiness, it’s the size of their loan payments. As the playwright, Ibsen, once wrote, “Home life ceases to become free and beautiful when it is founded on debt.”
The Most Important Rule
Granted, you can’t avoid debt if you want to buy a home today. But that debt should be as low as possible. It should be low enough to give you safety for the years ahead, no matter what happens to you. The real estate industry will often tell you – and the public loves to repeat it – that the most important rule when buying real estate is “location, location, location”. This is nonsense. The most important rule is safety, safety, safety.
Do not make the mistake that thousands of homebuyers are making today. They are buying to their absolute maximum. They go to the bank and discover the most they can borrow. And then they add this amount to their deposit (if any) which then gives them their stretched-to-their-limit maximum price. And then they go looking for a home in an area where their maximum price is the minimum price in their chosen area – if they are lucky. And they are just ripe to be sold by the people who make a profit when they buy, people who don’t care what happens to them after they buy.
Needs or Wants
It is easy to justify debt. There are so many reasons why we “must” have something, why we “need” to live in a certain area. But all these “must-haves” and “needs” are usually just a smoke-screen to hide an excess in desire which we rarely admit until it’s too late, until we are facing the grind and struggle caused by excess debt.
Most people confuse “needs” with “wants”. They say they need a four bedroom home. Even though there are only two people living in the home, they find a way to justify having four bedrooms. With young couples, they will say “children are coming”. But they won’t consider the effect that the extra debt can have on their family. A hundred years ago, an average family numbered four people and an average home had two bedrooms. Today, it’s the opposite – four bedroom homes with an average of two people per home. Yes, you may need “space” in the future, but you also need “space” between the amount you earn and the amount you have to repay.
The secret to safety is to prepare for the future before it arrives. Here’s what to do: Buy below your maximum price. If this means looking in a cheaper area, do it. If it means looking for a lower style of home, do it. If it means giving up that fourth or even third bedroom, do it. Better to give up a bedroom today than to give up the home tomorrow because you can’t afford it.
Most first-home buyers have no idea how many buyers before them would agree with this advice. If only they had not stretched themselves so far. If only they had been a little more careful. Maybe they would still have their homes – albeit smaller ones. Many would still have their marriages which began with dreams and desires and ended in nightmares of debt and despair. If you think this is too dramatic, take a look at the most expensive homes sold in our society. Many, if not most, are sold because of financial trouble or divorce. Check it out. And then check out your own desires and your ability to cope in the future.
One of the best safety rules is this: Whatever interest rate you are being charged, add four percentage points to it. How does it look now? Can you afford it? If so, go ahead and buy. And then pay your loan as if it was four percentage points higher. On the average home loan, this will save you about $100,000. It will also wipe out the loan in about half the time.
These are dangerous times for homebuyers, much more dangerous than the real estate industry is saying. They want you to buy now, they want to “talk the market up”, just as they always do. But has there ever been a time when the real estate industry has told consumers not to buy real estate? Has there ever been a time when they have warned people of the dangers of buying? And has there ever been a time when they have rushed to the aid of those who have been overcommitted by following their constant “buy now” advice? No. Most agents are always there to help you buy, but they won’t be there to help you make the repayments. If you get into financial trouble the next time you’ll see the agent is when you have to sell. And, of course, they’ll be eager to help you then. Don’t let it come to that.
Buying a home is important. But the only time to buy a home is when you can comfortably afford it. If that’s today, buy today. If not, don’t buy. Or buy the cheapest home in the cheapest area. Better to have a cheap home you can afford than a dear one that you can’t afford.
Real estate is wonderful if you remember the three rules of safety, safety, safety.