It's an indictment on our educational systems that most young people come out of school without any knowledge about mortgages or the process of buying a property. Given this, and the fact that the home buying process is often overly complicated, it's hardly surprising that many first time home buyers fall into some of the traps that exist.
However, with the average cost of a first time mortgage often being in six figures, avoiding these home purchase pitfalls is important if you are to enjoy the best possible start to your life as a home owner. In this article, I'll address the five most common mistakes that first time buyers experience.
1. Not doing enough research prior to buying:
Having checked your local property pages, you see a house that is within your budget and looks promising. You arrange a visit on a Wednesday afternoon and it seems like a nice house in a nice quiet neighborhood. You place a bid and are successful. This is great until you go back on a Friday evening and see that the streets are packed with beer-guzzling youths and the traffic's much heavier (and noisier) than you'd thought. Maybe you also discover that there's an adjacent district that offers much better value for money and investment potential.
It's understandable that people rush into buying their first home. After all, it's very exciting to picture yourself sat in your own home, rather than continuing to be either in the parental home or in a shared apartment! However, buying a house is a big financial and emotional commitment and you need to be sure that you're not going to have any regrets. Taking time to explore all the options doesn't need to take forever and will maximize the likelihood that you will be happy in your new home. And make sure you don't base your decision to buy solely on one visit. Property experts always recommend at least two visits and that you vary the day and time that you visit, so that you get a fuller feel for the environment.
2. Arranging a bigger mortgage than is necessary:
Mortgages are a type of loan, and loans are an expensive way to buy things. However, we recognize that getting a mortgage is nearly always necessary due to the sheer scale of house prices. The key, though, is to minimize the size of mortgage that you need and, to do this, you should try to make as big a down-payment as you can, whilst still leaving you with some savings to cover legal fees and general contingencies. Some first time buyers, however, either opt to take a 100% mortgage (although these deals are becoming scarce!) or just make the minimum required down-payment (which is usually 10%).
The result is that individuals often end up paying off a bigger loan than they needed to and this, of course, means paying off more interest on top of the capital amount. Before you commit to a mortgage amount, therefore, it's important that you've done your sums and worked out what size of down-payment you can comfortably afford.
3. Agreeing to a sub-optimal mortgage deal:
Getting a mortgage is similar in one regard to getting a new pair of shoes, in that it pays to shop around. Settling for a mortgage that has an interest rate of 5% may work out as a very costly mistake over the lifetime of the mortgage if you could have got one at 4%.
Additionally, first time buyers often agree to a mortgage term that is much longer than is necessary. Remember that the longer you take to pay off the mortgage, the more interest you will end up paying. Mortgage providers often quote a standard 25 year mortgage term but you are not bound to go with this. If you can pay off the mortgage in 15 years, then this will save you a lot of money.
Finally, it's vital that you've checked out the conditions attached to the mortgage. In particular, does the mortgage allow you to make lump sums payments or to increase your monthly mortgage payments should you find that you subsequently have more disposable income. Anything that allows you to pay off the mortgage more quickly will save you money. However, some banks are not very transparent in their mortgage terminology and terms and conditions, so make sure that you take time to go through the fine detail.
4. Not viewing the house purchase as an investment:
First time buyers are often primarily motivated by the desire to find their own place and they may not spend much time thinking about the longer term. For example, a one bedroom apartment in an inner city area may be perfect for your immediate needs and this may mean that little or no thought is given to whether it will prove a good longer-term investment.
Our needs, however, can change considerably over time. For example, people may get married, have kids, and may want or need to trade-up to a bigger house at some point in the future. Having a first property that has substantially appreciated in value will put them in a much stronger position to do this.
5. Not keeping on top of the buying process:
First time buyers often assume, perhaps not unreasonably, that their lawyer and their bank will complete all their necessary tasks without any drama. However, personal experience often reveals that these home buying professionals make mistakes or are overly tardy in completing the activities that they are required to do.
A first time buyer should never assume that their bank or lawyer is on top of everything. Make sure that you correspond with them frequently and get confirmation (ideally written) that they have completed milestones and that everything is on course to complete. The process is drawing down the mortgage, and completing the change of ownership documentation, is quite involved and any failure by one of the parties can complicate matters and may possibly even jeopardize the transaction.
Summary:
Most of us will be first time home-buyers at some point in our lives. It is a slightly scary process but one that you can get through successfully, provided that you approach it in the right way. Avoiding the common pitfalls will mean that you end up with a home that meets your current needs, that hasn't cost too much, and which will hopefully turn out to be a good long-term investment.