May 18, 2016
The right time to buy is different for everyone. Factors such as finance, selling another home, the property market and interest rates will have varying degrees of importance for each buyer. So how do you know when the time is right?
Essentially, the time to buy is when you are in a stable financial position. If you know you have the means to service a mortgage for the foreseeable future, you are ready to consider purchasing a property. If you pay too much attention to other factors such as the property cycle, you may never end up purchasing a home.
Here are four common reasons why buyers put off buying a property and solutions you may not have considered.
#1 The property cycle is at its peak
Getting into the market during a lull in the property cycle is every buyer’s dream. The property market has three distinct phases in its cycle: the boom, the slump and recovery. When prices peak, it’s inevitable they will eventually fall, but this can take years to occur. Every month or year you spend waiting for a slump is time you could be using to pay off a home loan.
What’s more disappointing for buyers is waiting for a slump only to discover a minimal correction in property prices. Given that there are no guarantees about what will happen in the market, you are best off looking for the best value properties in reputable areas. Even when the cycle is at its peak, astute buyers can still find themselves a good deal.
#2 Interest rates are too high
High interest rates are off-putting to buyers, but for every interest rate cut, there will eventually be an interest rate hike. Interest rates are part and parcel of having a home loan, and you can structure your mortgage to offset the sting of any rate rises.
While higher rates do mean higher loan costs, they also create a buyers’ market. High interest rates scare off many would-be buyers, but there will always be sellers on the market. With less competition from other buyers, you will have greater bargaining power when you do find the right property. And the savings you make on the final property price may even offset the temporary effects of higher interest rates.
#3 Waiting for another property to sell
Deciding whether to buy before selling another property is a difficult decision with a number of risks involved. If you find a property to purchase before your existing one has sold, you can consider using bridging finance to see you through the period between settlement dates.
Bridging loans are typically for six or 12 months, so you should only commit to one if you believe your property will sell within this period. There are many downsides to bridging finance – including accruing interest on two home loans at the same time – however this option can be a good compromise when you have found the perfect property to purhcase.
#4 Saving for a deposit feels like a pipedream
Saving a property deposit can take years, and not everyone is prepared to wait that long. If you fall into this camp and you would rather spend money on a home loan rather than rent, you can consider lenders mortgage insurance (LMI).
Available for borrowers without a 20% home loan deposit, LMI is a premium paid to the lender to provide them with protection in the event that you default on the loan. LMI isn’t cheap, but some buyers opt to take it out when rates are low, as they know they are saving money on interest, which will reduce their loan costs in the long term.
To decide which scenario has the best financial benefits for you, calculate how long it will take you to save for a deposit and then work out how much rent you are likely to pay in this time. Then estimate what your mortgage repayments are likely to be and how much interest you stand to make on your deposit savings if you do hold off buying. Comparing these figures will help you to decide whether paying LMI will bring you out on top.
Another alternative is to ask a family member to act as a guarantor. When you don’t have a deposit, a guarantor offers the equity in their property as a security for loan. That means that if you are unable to pay back the loan, the guarantor will be liable for the amount outlined in the contract. Lenders do have strict requirements for guarantor loans and will only approve a loan if you prove you can comfortably repay the loan.
Why there is never an optimal time to buy property
There are many factors that affect the price of property and the cost of mortgage repayments. It’s rare that you’ll find yourself in a position where competition, interest rates and housing prices are all low at once. For this reason, there is no magic formula you can use when purchasing property. Instead, wait until the right property comes along when you can afford it.
The good news is that once you have jumped over the obstacles above and you are on the property ladder, servicing a mortgage that is within your means is relatively straightforward. So if home ownership is a goal you have been working towards, there is a solution to get you into your own place sooner.
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