Twelve Money Mistakes to Avoid Before Buying a Home
Buying a home is a significant milestone, whether you’re a first-time buyer or looking to upgrade. However, recent trends show that younger generations are postponing their entry into the housing market. Factors such as mounting student loan debt, delayed marriages, escalating rental expenses and the choice to reside with parents longer are contributing to this delay. While waiting to buy a home can provide more time for financial preparation, it’s essential to avoid certain common money mistakes that can impede your progress. Here, we’ve identified twelve crucial mistakes to steer clear of to ensure a smoother journey to homeownership.
1. Expecting a Big Return
If your primary motivation for buying a house is to stop “wasting money on rent” or because you view it as a sure-fire investment, you might not be fully prepared for the responsibilities of homeownership. While some areas experience significant property value growth, the average family home typically doesn’t provide substantial financial returns once you account for additional costs and inflation. Instead of focusing on potential profits, prioritise finding an affordable home that meets your non-monetary goals, such as being in a good neighbourhood or providing a suitable environment for starting a family.
2. Combining Too Many Life Events
New beginnings are exciting, but trying to juggle multiple major life events simultaneously can wreak havoc on your finances. If you’re planning to get married, adopt a pet, have a baby, and buy a house all within the same year, you risk overwhelming your budget with unexpected costs. Achieving your financial goals takes time and should be paced according to your circumstances, not external pressures or societal timelines.
3. Using Your Emergency Savings for a Deposit
While having substantial savings is beneficial when buying a home, it’s crucial to keep your house deposit separate from your ‘emergency fund’. Your emergency savings should cover 3-6 months of living expenses to safeguard against unforeseen events. Maintain your deposit savings in a safe, liquid account, especially if you plan to purchase within the next three years. This approach ensures you have a financial safety net while steadily working towards your homeownership goal.
4. Investing Your Deposit in the Stock Market
Although investing your deposit money might seem like a quick way to grow your savings, it introduces unnecessary risk. Market volatility can jeopardise your ability to afford a home when you’re ready to buy. If you plan to buy a home within the next three to five years, keep your deposit in cash or a similarly secure investment, even if interest rates are low. This strategy provides safety and liquidity, offering peace of mind and consistent progress towards your goal.
5. Not Maintaining Steady Employment Income
If you need a mortgage to purchase your home, consistent employment history is essential. Lenders require proof of stable income and a solid employment record. Even if you plan to start your own business, it’s wise to secure your mortgage while still fully employed or wait until you have a few years of business earnings to show. Most lenders prefer three years of accounts to evaluate your financial stability.
6. Accumulating Excessive Debt
Your credit history significantly impacts the interest rate and amount you can borrow for a mortgage. High levels of outstanding debt can negatively affect your credit rating and reduce your borrowing capacity. Aim to reduce as much debt as possible before applying for a mortgage to secure the best deal and avoid the burden of combining mortgage debt with other financial obligations.
7. Overlooking Additional Costs
Homeownership involves more than just the mortgage payment. Buyers often forget about other significant costs like Council Tax, home and contents insurance, life/mortgage insurance, maintenance, repairs, and utilities. Failing to budget for these expenses can lead to financial strain. Ensure you factor in these additional costs when calculating your budget.
8. Not Accurately Assessing How Much You Can Afford
Before getting carried away with kitchen design plans or choosing the number of bedrooms, it’s vital to determine how much mortgage you can realistically afford. Consider all associated costs, including Council Tax, insurance, utility bills, and ongoing maintenance. Well-intentioned advice from friends and family might push you beyond your comfort zone, but it’s essential to base your decisions on your financial situation. A good rule of thumb is to limit your monthly mortgage payment to around 30% of your post-tax income, allowing room for other financial goals and leisure activities. If you have student loans or other significant debt, you might want to limit your mortgage payment to 20% of your post-tax income to prioritise becoming debt-free.
9. Ignoring Your Credit Score
Your credit score significantly affects your mortgage rate and terms. Buyers often overlook the importance of a good credit score when planning to buy a home. Regularly check your credit report for errors, pay down existing debt, and avoid opening new lines of credit before applying for a mortgage to improve your credit score and secure better loan terms.
10. Not Shopping Around for the Best Mortgage Rate
Settling for the first mortgage offer you receive can cost you thousands over the life of the loan. Mortgage rates and terms can vary significantly between lenders. Take the time to shop around, compare different lenders, and negotiate for the best rate. Even a slight difference in interest rates can lead to substantial savings. Consult a specialist mortgage adviser who can guide you through the process and find the best deals for you.
11. Forgetting to Account for Lifestyle Changes
Your needs and lifestyle might change in the future. If you plan to have children, start a home business, or care for ageing parents, ensure your new home can accommodate these potential changes. This foresight can prevent the need for another move in the near future.
12. Not Having a Long-Term Financial Plan
Buying a home should fit into your broader financial plan. Consider how this purchase aligns with other long-term goals, like retirement savings, children’s education funds, and lifestyle aspirations. Ensure that homeownership doesn’t derail your overall financial strategy.
Summary
Avoiding common money mistakes is crucial for a smoother journey to homeownership. Prioritise financial stability by keeping your house deposit separate from emergency savings, maintaining steady employment, and reducing outstanding debt. It’s also important to avoid risky investments with your deposit and to accurately assess how much mortgage you can afford, factoring in additional costs like Council tax and maintenance. Ensuring a good credit score and shopping around for the best mortgage rates can also save you money in the long run.
While purchasing a home is a significant financial commitment, careful planning can help you navigate the process more smoothly. It’s crucial to balance the excitement of buying a home with a solid understanding of your financial situation, ensuring that your purchase fits into your broader long-term goals, such as retirement savings or other investments.
Approach homeownership with patience and foresight. Make informed decisions, safeguard your financial stability, and keep your goals in sight. By taking these steps, you’ll build a strong foundation for your future –both as a homeowner and in your broader financial life. With the right mindset and careful planning, you’ll be able to enjoy the rewards of homeownership without sacrificing your long-term financial well-being.
If you would like to talk about any of the issues in this article or need more general help with your finances, please get in touch with us.
NorthStar Insights
Stay right up-to-date with the latest financial news, get expert insight and analysis and exclusive special offers to help you make the most of your money.
NorthStar Insights is the free email newsletter enjoyed by over 3,000 people across the UK. Subscribe now to never miss another update.
Latest Articles
Budget 2024 Summary: Everything You Need to Know
Talk Money Week 2024 – We’re Proud to Be Supporting This Nationwide Initiative to Get People Talking About Money
Stay Ahead of Scammers: Your Essential Guide to Avoid Becoming a Victim of Financial Fraud
Six Top Tips to Be a Successful Investor
A Dozen Essential Finance Lessons to Teach Your Teenager
Don’t Miss the Deadline to Increase Your State Pension by up to £60,000
How The General Election Result Could Affect Your Finances
Intergenerational Wealth Planning – Your Options to Pass on Wealth to the Next Generation
Mastering FIRE: Unveiling the Path to Financial Independence and Early Retirement
New Study Reveals a Quarter of Britons Have Sleepless Nights Due to Money Worries
How the Abolition of the ‘Lifetime Allowance’ Could Benefit Your Retirement Plans
Budget 2024: The Key Announcements
Embrace Evidence-Based Investing to Grow Your Wealth
Fall in Love with Your Finances This Valentine’s Day
Preparing for a Century: Financial Considerations for Living to 100
Disclaimer
The content of this article is for information purposes only and does not constitute a personal financial recommendation. You should always speak to a regulated financial planner before taking financial advice. This article is intended for UK residents only. All information correct at time of publication.
Tag Cloud
Awards, Accreditations & Trade Associations
NorthStar is proud to be a member of the leading financial planning trade associations. Through a continued commitment to adhere to the highest professional standards and deliver exceptional service, NorthStar has received a number of awards and professional accreditations.