First home buyers have had to gradually change the way they think about their first home. In a way, that change has been about getting back to basics.
Before 2008 we all believed that house prices would go up – so we didn’t need to repay debt.
I was talking to clients this week who have been paying off their home loan for nine years. The mortgage is currently $350,000 on a $550,000 property. Sounds okay, right? The thing is, they originally borrowed $200,000 so in nine years they successfully paid off… minus $150,000!
Even back then, you could not just rely on property prices increasing. The answer back then was to leverage a second and possibly even a third property. That way a homeowner could build up enough equity across all three properties, sell two, and then be debt-free on the one left. For some people this was a very successful strategy.
We cannot rely on price increases in the foreseeable future. Sure, prices might go up, but there is a high probability they won’t and prices might even fall. As such, no matter how many properties a person buys it doesn’t take away from the need to repay debt.
I’ve noticed that our clients, and especially first home buyers, are looking at their mortgage more closely now. They are planning to pay the mortgage off faster, and they are looking ahead. That might be the type of client we attract, but I suspect there is a gradual behavioural shift occurring. More people are realising that getting smart about your mortgage can easily save you over $150,000 in interest.
Everyone talks about hard it is for first home buyers. I don’t think it’s that hard if you think, plan, and manage your money.
It is easy to save a deposit. At 25 a person can put away $1,000 per month. At 28 that is $40k for someone who is single and $80k for a couple. If we are honest – saving a deposit is hard because most people don’t think beyond what they need tomorrow. Saving a deposit over three years only sounds a long time when you want a house now!
When it comes to the mortgage, the other important thing is to borrow an amount you can pay off quicker than 25 years (not what the bank will lend you.) You then need to force yourself to stick with paying it off quickly at least for the first three years.
The first three years of a mortgage are the most important because you build up the momentum that will serve you well later on. Owning a first home will always involve sacrifices. The sacrifice is either pulling back on your lifestyle at the start, or much bigger trade-offs later on when you have two kids and a reduced household income. It is very easy to become trapped by your mortgage if you do not plan ahead.
So our message is always to go as hard as you can from the start. You can then slow down later on when circumstances change without the mortgage controlling your life.
The mortgage isn’t something you can park under your bed and hope it goes away. For now at least it is something you will have to repay. Sounds obvious but the thought of having to actually repay debt is the new black! Okay, that was a bit random.
The former General Manager at ANZ National Bank, JB has brought is broad depth of experience in the banking industry to Squirrel, which is his own company. JB has directly managed over $30 billion of mortgages and deposits and is a regular commentator on the mortgage market in the press and on TV. JB has a BCA from Victoria University and has undertaken post graduate study at University of London. He’s easy going most of the time, except when it comes to his calculator (he’s pretty neurotic with it).