By Amanda Morrall (email)
Regular readers of my blog will know that I've come down with a bug; the property bug.
I wrote about it last Friday and was besieged with all manner of advice about whether to stay the hell out of Auckland's over-priced housing market,or suck it up and go forth with caution. Some good value for other prospective first time home buyers in that comment thread.
I'm still sitting on the fence although there were many persuasive arguments pro and cons, so thank you all.
Affordability is the underscoring issue for first time home buyers. I was therefore interested to read this piece published in the Globe and Mail on the "reality test for would-be buyers.'' Worth your time to read if you're in this boat.
The writer, personal finance editor Rob Carrick, makes a very good point on the issue of affordability which is the dangerous and yawning gap between what banks suggests you can afford and what you can actually afford. Given that some banks here are lending at a loan valuation ratio of 95%, there is good reason to be cautious about long-term costs.
You might think that banks, given it's their money (well actually a good chunk of it is money they're holding for you and I so we don't have to put it under our mattresses) would err on the most conservative side to protect their interests.
As Mr. Carrick adroitly points out, the banks will cover their butts sufficiently, naturally, but that risk calculation is not necessarily in your best interests.
Professionals working in the clean-up aisles for those who get in over their head caution borrowers against using the bank's lending criteria to determine affordability.
A fellow quoted in the story suggests that as a measure of affordability, your mortgage payments, rates and insurance should be no more than 30% of your take home pay. Using your gross salary won't give you a meaningful gauge of your actual ability to meet your financial responsibilities.
The argument for using this more conservative estimate is that you'll have a lot more wiggle room if you have a financial emergency, if interest rates go up, or if your circumstances should change. All of these are distinct possibility.
In our home loan affordability calculators and calculations at interest.co.nz we use a benchmark of 40% of take home pay. We also use aggregated averages as a way to price in insurance and rates etc into our home loan affordability report, so it might not necessarily fit your specific circumstances.
I thought I'd provide a few links today for would be home buyers as they pick through the minefield of considerations.
As a starting point, I'll direct to you that story I referenced above.
I love this one but please note: it doesn't factor in rates or insurance and works off a 40% assumption.
Chock full of good information to consider; charts, and a region by region affordability guide (updated monthly.)
This is another one to bookmark if you are shopping around. You can plug in the address of the prospective home to buy and find out the rates, the rateable value and land value. I did some snooping yesterday and was surprised to see that my current rental home is worth $130,000 for the building and four times that for the land. The price you pay for living near a beach. This link above is Auckland centric too but you can find the same by going to the local council in whatever region you are eyeing and do some similar cyber snooping.
The Christchurch earthquake has been a game changer for the house insurance market. It was a harsh lesson for many about reading the fine print closely and more importantly understanding it. The link above will take you to Consumer New Zealand's 2011 house and contents insurance report.
It's a fairly comprehensive report on traps to avoid, rates comparison and policies. It also has some useful tips on ways to save as well as general advice. It's written in print that you can actually see and language you can actually understand.