The year was 1995. I was about to buy my first property. I was 23, renting, and working in the bank.
I qualified for a preferential loan which was about 5% at the time and I thought renting was a complete waste of money. Why should I pay someone else’s mortgage when I could be paying my own, I thought?
I had mortgage approval in place and just before I started looking for a property, I was telling a gentleman who worked in the same bank as I did, only for a lot longer than me, what I was about to do. Without doubt he gave me one of the best pieces of advice I have ever received — and it was to simulate the total monthly cost of having a mortgage before I actually took the plunge. And it was lucky I took his advice because I clearly wasn’t ready — in fact it took me another two years before I knew I was.
The idea of taking a trial run on a mortgage is something I benefited from, which is why it is something I always tell prospective home owners they should do because it will show you exactly what your financial life will look like if you take on a mortgage. It takes the element of surprise out of becoming a home owner.
Your starting point is finding out how much you can get approval from a bank. So, what is the maximum amount they will give you? If it is, say, €200,000, then over a 30-year period the monthly repayment would be €1,074 at a 5% interest rate. But what if rates were to increase? Would you be able to cover the monthly repayments?
In the table below is an example of how a monthly repayment can change when rates increase.
It is important to have a buffer in place from either your income or savings to call upon if rates were to increase. And you will know if you do, by making trial repayments (into a savings account by the way — great way to save money and test yourself at the same time) not based on the exact amount you would be paying if you purchased right now. Start the trial at 1% higher than what your payment would be. And of course you are going to have other fixed mortgage/property related outgoings on a monthly basis as well, such as home insurance, mortgage protection, water and property taxes, and management fees.
These are often things people forget that they have to pay (especially those who live at home), or if they don’t forget, they are not exactly aware how much each will cost (those who rent but don’t have these associated costs).
So you really have to build these expenses into your budget, find out exactly what they are, pay 1% more than your mortgage repayment will be, and this will give you a good idea if you are mortgage ready or not.
When I did this exercise myself, way back when, it showed me that I wasn’t ready. I was fine for the first month but I struggled to pay the amount required in months 2 and 3. It also created massive awareness that I was exhausting all of my savings, which were going towards my deposit. I had nothing left over.
I was still, however, trying to convince myself that it would still work out if I cut back a bit here and there from my monthly budget.
What this exercise also highlighted for me was that there were some things I could not foresee and plan for, such as the cost of going to weddings, weekends away, buying new golf clubs, etc, and these were expenses that I didn’t want, or was ready, to sacrifice just yet.
So I put off buying a property, continued to rent for a couple of years, stayed out of debt, saved like hell, and altered where I wanted to live to reduce the amount I borrowed.
Two years later, I took the plunge and bought a property that was within my comfort zone. I had two years to get used to what my monthly repayment would be, and I would have savings left over after paying my deposit as well. Doing a test run helped me figure out what was important to me and whether buying a property was actually the right thing for me.
I firmly believe those two years helped me make a thoughtful and informed decision — and I didn’t feel pressurised by having to get on the “property ladder” like others did, or that I would be buying more than what a house would have cost me if I bought it earlier.
This was a long-term decision for me and one I luckily didn’t rush into. Buying a property for the first, or indeed second, time is a daunting task. Monthly mortgage repayments aren’t the only thing you need to be aware of and if you take that trial run for three or four months before you actually buy, it will be one of the best exercises you will ever carry out and confirm whether you are financially ready or not.
Liam Croke is managing director of Harmonics Financial Limited
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