API asks a number of experts who deal with first homebuyers regularly for a list of the most destructive mistakes they commonly make. Ben Power
Buying your first home can be a daunting task. It’s by far the largest financial transaction you’ll ever make. Yet many are woefully ill prepared to ensure they make a good purchase decision.
Because the stakes are so high, one bad mistake can be financially and emotionally devastating, ranging from losing all your money to missing the house of your dreams over a simple oversight.
Most experts agree that first homebuyers make mistakes in three general categories. The first is overlooking simple factors, such as a potential rise in interest rates. It may seem obvious to most, but a first homebuyer doesn’t have the experience of having hefty interest rates on their mortgage so can easily discount the chance of big rate rises.
The second – but perhaps the biggest – cause of devastating mistakes is listening to people you shouldn’t. A first homebuyer is a babe in the woods and can easily fall prey to others, including highly experienced real estate agents and mortgage brokers.
The final category is buying based on too much emotion, rather than sensible well-thought-out criteria. First homebuyers are particularly susceptible to sales pitches and dressed-up properties that lack solid fundamentals.
We spoke to a mortgage broker, property lawyer, real estate agent and property adviser to find out what the biggest mistakes first homebuyers make are.
1. Assuming interest rates will stay low
Kris Court, a director of Court Financial Services, says many first homebuyers are about to get the shock of their lives.
“All these first homeowners are working out mortgage repayments on an unrealistic interest rate,” he says. “They’re not putting any buffer in.”
Interest rates are on the way up as the economy recovers and inflation is seen as a greater threat, with the Reserve Bank of Australia (RBA) raising rates in November to 3.5 per cent.
Court says first homebuyers should be comparing today’s mortgage repayments with those in August 2008, when the RBA’s official cash rate was 7.25 per cent.
“If you’re not prepared for that three to four per cent buffer you’ll really be in trouble,” he says. “They’ve gone down very quickly; they can go up just as quickly.”
Court notes that a homeowner with a $300,000 home loan is paying $1656 per month in mortgage repayments, against $2420 at the same time a year earlier. “That’s a massive difference on a monthly basis for two people on $40,000 each,” he says.
If interest rates rise quickly, a first homebuyer can face financial ruin and loss of their house if they fail to meet repayments.
2. Underestimating the full costs of buying a home
Court says many first homebuyers also fail to budget for the full costs associated with buying a house.
“People never take into account all their costs in terms of mortgage insurance, the correct stamp duties, rates and things they have to pay at settlement, including body corporate fees that haven’t been paid,” he says, adding buyers may also have to pay for valuation costs and loan application fees which are becoming more common.
The result? “Begging and borrowing to get some extra money from your mums and dads,” he says.
One of the biggest areas first homebuyers trip up on is mortgage insurance. Court says in the past you could borrow 95 per cent of a home’s value, with mortgage insurance of two per cent.
The lender then added that on the loan, so in effect would lend you 97 per cent.
“Now they won’t do that,” he says. “You have to pay for that mortgage insurance cost out of your own money.”
Court says people sign contracts, then realise they have to pay for all the additional costs.
“Some get a personal loan or credit cards, or something stupid like that,” he says. “You’re then on the back foot financially and probably will be on the back foot for the rest of your life.”
3. Short financing periods
Peter Mericka, a legal property expert and director of Lawyers Real Estate, believes listening too much to real estate agents and mortgage brokers leads to the most disastrous first homebuyer mistakes.
“Between them, real estate agents and mortgage brokers are responsible for some of the worst mistakes,” he claims.
One classic is when first homebuyers who need finance to buy a house begin asking questions about finance conditions. Mericka says real estate agents – in a bid to get an unconditional contract – convince them to put short 10 to 14-day finance periods in the contract.
“Then they’ll say, if you need more time you can get an extension,” he says. “But you can’t get an extension. The contract says if finance isn’t approved you can end the contact.”
Mericka says the only way to get an extension is to end the existing contract and renegotiate a new one.
“The risk is you can then get gazumped,” he says. “The vendor will accept your cancellation and sell it to someone else.”
Mericka says it’s much better to have a longer period to secure financing and recommends at least 21 days.
4. Not paying your deposit
Mericka says first homebuyers also go astray when they try to be tricky with deposits to buy homes. He says some mortgage brokers advise them not to pay their deposit, which is usually required within three days of the sale, until finance has been approved. That may appear to be a neat way of avoiding risk by the first homebuyer, but “the contract says that if you want to cancel the contract because finance hasn’t been approved, you must not be in breach of any other condition of the contract,” Mericka says. Failure to pay a deposit has been a clear breach.
“You’ll get a letter back saying you’re in breach of the contract so you’re not entitled to end the contract,” he says.
5. Allowing real estate agents to insert a building inspection condition into your contract
Mericka says another mistake is letting real estate agents influence what you insert into contracts. He says a classic first homebuyer mistake he sees is in the area of building inspections.
In Victoria, for example, the Real Estate Institute of Victoria has issued a building inspection clause. He says agents recommend first homebuyers use it. If they then have an inspection and find the house is riddled with asbestos and faulty wiring, for example, they naturally try to cancel the contract and pull out. The first homebuyer “gets a letter back saying ‘you can’t cancel because none of those things constitute a major structural defect’,” Mericka says.
“They then look at the building inspection clause and it says ‘the purchaser may end this contract if the building report discloses a major structural defect’.”
Mericka reads a major structural defect as something that “affects the ability of the building to stand up”.
“Anything less than that means you can’t pull out,” he says. The buyer is stuck with the dodgy house.
Mericka recommends changing the building inspection report clause so that it allows you to withdraw from the transaction if the property “is not to the purchaser’s satisfaction”.
6. Assuming you’ve got bank approval
First homebuyers are always thrilled after their first meeting with the bank when they’re told how much they can borrow. A bank may say, for example, you earn $50,000 and have a $10,000 deposit, so – in principle – we’ll lend you $400,000.
Peter Gordon, a sales agent with real estate agent Cobden & Hayson in the Sydney suburb of Balmain, says many first homebuyers assume they’ve got all their financing lined up and rush off and bid on a $400,000 house.
Gordon says some buyers simply go onto the bank’s internet site and use the calculators to see how much they can borrow, and assume that equates to getting financing.
But Gordon says there’s a big difference between what the banks indicate they can lend you and what they actually will.
“Anyone who wants to tender an offer on a place should be in a position to sign a contract,” he says.
Gordon warnes not having finance lined up exposes first homebuyers to the emotional distress of losing their dream home.
“It’s more of an emotional thing,” he says. “They make an offer and get their heart set on a property and think their finance is approved. Then it gets knocked back.”
7. Freaking out at building inspections
Gordon says one of the biggest mistakes he see first homebuyers making is freaking out over building inspection reports.
Most buyers take the advice of solicitors and organise a building inspection.
“One of the common things we see, particularly in areas like Balmain, where houses are 100 to 120 years old, is that all have got some rising damp, some termite activity,” he says. “But when you read it on a building inspection report, it sounds terrifying.
“First homebuyers often think ‘there’s no way we can buy that’ and they pull out.”
That’s until they realise they’re buying an old house.
Gordon has seen some potential buyers get five to six building inspections done at $500 each. But he says it’s important to have realistic expectations as to what it means to buy a house.
“Just about every house that’s more than 60 years old will have some historic pest activity,” he says. “It’s not necessarily a problem, but there’s a history of it.”
He says reports are written in a way to cover the writers who tend to paint problems in their worst possible light.
Gordon suggests having a verbal conversation with the builder who did the inspection to get a non-legal view.
Ask questions including, would you buy it and is the report average?
8. Going beyond your budget
Every potential homebuyer knows the feeling. You’re looking around at a $400,000 house which fits your budget, but that $450,000 property just looks that much more appealing.
Scott McGeever, director of Brisbane buyers’ agent Property Searchers, says it might appear simple and obvious, but one of the major causes of grief for first homebuyers is the failure to stick to their budget.
“People will always want more than they can afford,” he says. “There’s always a real estate agent who’ll talk them up into the next level.”
Suppose a couple have a $400,000 budget on a house. “Almost every time a real estate agent will say ‘have you got 450,000?’ as if $50,000 is $5,” McGeever says.
He says the bank has usually offered to lend $400,000 for a reason based on strict criteria, including, for example, two salaries and a honeymoon interest rate. Going above what you can sensibly afford leaves you extra exposed to financial shocks, including sharp rises in interest rates.
9. Bedazzled by tarted up houses
Why is it so hard to stick to a budget? McGeever says it’s closely tied up with another mistake first homebuyers make: “buying with their heart rather than their head”.
“First homebuyers obviously buy for a home,” McGeever says. “But that doesn’t mean they need to buy a home that’s a bad investment.”
One of the biggest dangers for first homebuyers is being bedazzled by bells and whistles – in this case slick renovations and fixtures.
“You often see people that go and buy something that’s shiny and new,” he says.
“They get completely bedazzled over and above the fact it sits behind the southast freeway or backs onto a train line. Particularly in this market, you see houses tarted up to within an inch of their lives. First homebuyers really love that.”