You’ve met your New Year’s Resolution, you’ve finally taken the biggest step of your life, and are now a homeowner. Your friends and family didn’t think you could do it, even your banker seemed a little skeptical. But you ploughed ahead nonetheless and now own your very first home. The only thing you hadn’t foreseen was that owning a home would make you broke. House poor.
Does that sound remotely familiar? Or is this something you fear?
Since I invested in my first home just over a year ago, there are five tips I will be sharing with you so that you don’t turn out like me. House poor, that is!
“Before talking about ‘house poor’, where is the housing market even heading?”
Since purchasing my house at the start of the pandemic, I have been in shock at how the housing market has taken off. Thinking about it logically, many people have shifted from the ‘lock-up and go’ mindset, to wanting a home that they wouldn’t mind being locked up in for weeks. Call it the pandemic fever, but the demand has pushed the prices to record highs.
Luckily, this seems to be a short-term blip as the insanely high prices are unsustainable. According to Bloomberg, the income to house price ratios is already so out of line that household budgets will soon begin to crumble. But with upcoming interest rate hikes… Will any correction really make much of a difference on the average wallet?
For context, I work in financial markets, so interest rates are a thing we pay notice to every day. And with interest rates expected to increase over the next few years, it is important that people factor in the increasing costs they will incur on mortgages.
Find out your real affordability
The best and simplest way to check your estimated monthly payments from the comfort of your home is to use an online calculator. There are many on the web, but since I love its interface and functionality, we’ll use this one. Specifically, because it shows the breakdown of how much you will owe as time goes on.
As an example, I’ve run a simulation on a house that costs £300,000 that I would want to pay off over 25 years. Also to note, I’ve assumed an interest rate of 3%.
Logically speaking, if I earned £ 5,000 a month, the below option would appear to be within my range as it would come in short of 30% of my monthly income.
But that is not all that matters. How soon do you want to retire? How will your lifestyle be affected if I marry this debt? What about your pension contributions? Which leads me to my next point.
Calculate your monthly expenditure factoring in the mortgage payments
Related: Things I realised after buying my first home
Once you have figured out how much the mortgage will cost you monthly, you need to factor in your other expenses. Do you like grabbing coffee every morning on your way to work? How much do you spend on takeout each month? What is the contribution towards your health insurance, etc?
The easiest way to figure out just how much you need to spend is to take your previous three-month expenditures. Once you get that number, factor in inflation because your costs are bound to go up. Now that you’ve got that number, add on monthly savings for your emergency fund. And when that number is tallied, remember that you will need to fix things here and there. Owning a home is no joke!
Scope around for areas you would like to live in
So you’ve figured out what you can afford and how much your finances will suffer once you commit? Now is the fun part – searching for your actual home. I personally picked my home based on where the good schools are located and the distance from the business centre.
I then went a little deeper into the location by factoring in safety, nearby shopping centres and hospitals. Once I figured out specific areas that fit my criteria, I then started eliminating the most expensive locations based on the houses on the market. All the while, I made sure not to compromise my non-negotiables; safety, distance from good schools and nearby hospitals.
Your list could be different, and that’s okay. Just remember that you will not work at the same company forever, so don’t base your permanent home on your temporary job.
Get quotes from different banks
One thing that I am grateful for was our ability to negotiate our interest rate. But of course, no one actually told us that we could do that!
So my professional advice to you is to get quotes from as many banks as you can, then play them against each other. The likelihood is that you will find a few that are priced much better than others, so use it to your advantage.
Seeing 2% at bank A but your salary is paid into bank B that is asking for 3%? Tell bank B that you love their service but will have to move all of your business to bank A if they can’t match the rate. And while you’re doing it, don’t feel bad. All is fair in business and… okay, that’s not a saying, but you know what I mean! The banks don’t really care if you become house broke so long as you meet your monthly payments.
And don’t stop there. After every few years, do the same thing again. I was lucky enough to reduce my interest rate just one year later by applying this trick.
If you can’t afford what you want, it’s okay to wait rather than becoming house poor
Yes, you read that right. If you can’t afford the house you want in that specific neighbourhood, just wait it out a bit. I compromised on this factor and purchased a house in a lovely neighbourhood but with a non-existent backyard. It didn’t seem like a bad choice at the time because I could just sell it later. After all, real estate is an investment right?
Well, yes and no.
In one weekend, we had sought and put an offer on what is now our home. And just six months after purchasing, we tried to sell it. The keyword is ‘tried’. We had upgraded the home with solar power, a rooftop garden, and many cool features that we were proud of. After six weeks on the market, we decided to pull our listing because it just wasn’t worth taking the knock. So we will have a toddler running on a rooftop garden for the foreseeable future. *Pray for me!
What I would tell ‘2-year-ago me’ is to continue renting until I found what was right for my family. Buying a house is a big step, there’s no need to rush it.
Have you ever become house poor before? What is some advice you wouls give to somoene buying their first home?
How would the place you’re renting compare to the house you want to buy? I’d think rent somewhere that would cost you half the mortgage and save the other half, that sound right?
If that’s an option, then definitely. But I’m my case, being a foreigner, two mortgages isn’t quite an option. A lot of people getting their first homes would also have a similar issue with dual mortgages unless they are earning a lot, so in this case I’d recommend just renting a tad bit longer. Downsize the rental, but continue renting.
great advice on so many levels.
great advice on so many levels
Thanks for reading’
Excellent tips Shelly. The smartest financial move we ever made was buying a house we could afford—and still have a life. The second smartest smart financial move was staying in that house after we paid off the mortgage even though we thought we needed a bigger house. Now that we’re getting closer to retirement, we’re not faced with downsizing and moving.
That’s perfect actually. How long have you lived in your house?
We’ve been here for 28 years.
We’ve only owned two homes in our 35 years of marriage. One of the things that people need to consider (especially if they’re a little older) if they plan to be in the same house for a long time, is how will going up or down stairs be as they age? We’ve been in our current home for 26 years. We’re grateful to live in a single-level unit. When we stay with someone with stairs, my wife always remarks how much she dislikes split levels.
This is awesome Shelly. My kids just bought a house and I need to pass it on,
Thanks for an informative post my friend!💖🙏
Great, great informative article Shelly! You really did your research!
I first bought my condo in 2012 on my own and now living in a home my husband and I bought together. Both times I/we worked hard not to be “house broke.” It’s a bit easier with a two-income-household. The way I did it when I first bought on my own was being on a very, very tight budget. And it started out when I was saving for the condo. I budgeted so hard and instead of “spending the rest,” I would “save the rest.” The only difference is I paid myself (which I think is so important). (Will be writing an article about all this soon.) And because I budgeted so hard, I was able to put down a 20% mortgage and when I did buy, my biweekly mortgage was LESS than the amount I was used to saving prior to being a homeowner.. Great article – saving/investing/budgeting is such a fascinating topic to me!!! 😀
This post has made me realize how aimlessly I’ve been saving towards my goals and why I don’t always succeed – I seem to ignore the smaller underlying factors that add up towards the success of my financial decisions. As always, you’ve enlightened me, thank you!
Thanks for reading!
This post really highlights the importance of financial literacy in our societies as we grow older and feel the need to settle down to form some sort of stability in our lives. Great content as always, kudos!
Thank you, dear!