The old adage of ‘keeping up with the Joneses’ is alive and well according to a survey released by Finder.com.au with 1-in-5 Australians admitting to feeling pressured to buy a bigger home than their friends.
Of those surveyed, 1-in-10 worry about what others will say behind their back and couldn’t handle not living in as good an area as their friends.
But Jeremy Cabral warns that people should take into account more than just the opinion of their pals when purchasing a property.
“If not, they risk getting themselves into extortionate home loan debt they may struggle to pay off,” he says.
“Purchasing your own home is an exciting time and it’s easy to get distracted by other people’s opinions or feel pressured to purchase a place that will impress others or make them envious of you.
“The reality though is that home buyers need to consider the cost of keeping up with the Joneses and whether they can afford the repayments on a bigger property in a more highly desirable area. Rushing into a decision like this can end up costing gravely down the track.
Mr Cabral says it’s better to buy something more suited to your budget and buy “bigger and better once the equity builds up.”
He has these five factors to be aware of before signing up to a home loan.
1. Budget higher than the official interest rates
Although interest rates are at a remarkable and seemingly sustained low in Australia, variable rate home owners are encouraged to calculate the budget for their home loan around 2% higher than the actual cash rate. This will safeguard them against unexpected interest rate changes that will occur down the track.
2. Economic factors
The economy is uncertain and jobs are not as secure as they used to be. We can no longer simply rely on the annual bonus or pay increase to cover home loan debt.
If you’re taking out a home loan, do not factor in bonuses or expected increases to your salary when calculating their home loan budget. Base it on what you’re earning now and without any added extras, such as overtime (unless you’re in an occupation with rostered overtime such as doctors and nurses).
3. Get an estimate of how much you can borrow
Historically couples relied on the sole earner to pay the mortgage. Those days are long gone it would seem as couples now rely heavily on both incomes to cover the home loan payments.
A borrowing power calculator is essential to ascertain how much home buyers can borrow. Couples should base their home loan budget on one or at most 1.5 incomes to allow for any changes to their income that may occur.
The first step first home buyers should take before selecting their desired home is to calculate their budget. We have launched calculators to simplify this process for consumers:
First, calculate how much income can be spent on a property http://www.finder.com.au/home-loans/home-loan-calculators#tax.
Then calculate the mortgage repayments required for the loan amount and the monthly payment http://www.finder.com.au/home-loans/home-loan-calculators#repayments.
4. Don’t take the maximum loan amount
Regardless of whether the lender offers the maximum amount, buyers should be steered by their budget and borrow less than what is offered. Consider your repayment terms rather than seeking approval for the maximum home loan.
5. Home loan market growth
The home loan market has grown considerably in the last number of years. This spells good news for first home owners but can seem confusing. It’s important to take your time, compare all the home loan options available to you before signing on the dotted line.
And the bottom-line?
“We all want our dream home and by taking a sensible and considered approach to the property ladder, there is no reason why this can’t be achieved.
“But jumping into a massive home loan to impress others is not advisable,” concludes Mr Cabral.
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