The Biggest Mistake Being Made by Home Buyers Today

And how to avoid making it yourself

The face of investing has changed significantly since the days our parents were figuring out what to do with their disposable income.

The advice of the average father was to invest in property, the “can’t go wrong” foolproof investment.

But as the final quarter of 2019 showed us, things can very much go wrong with property investment.

A Sure Future

The lie we were told even a decade ago was that property values would only ever go up. Part of what made the financial crash of 2008 possible was the public’s unwarranted and unrelenting belief in the power of property.

Investors were confident that everyday people would always pay their mortgages, and that even subprime mortgages were a safe bet.

Banks packaged unsafe mortgages with safe ones in CDO’s with the hope that no-one would see the difference, or care to look.

Banks were combining unsafe mortgages with a whole lot of fraud, and this meant that once a certain percentage of people defaulted on their mortgages, the whole system fell down.

The truth is that housing is not a sure thing, and not everyone can afford the mortgage they took out. Early in 2019, interest rates were at an all time low, and property values were sitting at an all time high. This meant that eventually the interest rate had to rise, and that the property values had to fall.

Property values have been falling all across Australia over the past year, in some places as much as 9% and beyond.

This devastating turn of events has coupled with the biggest mistake being made by the home buyers of our time.

Interest only Mortgages

A mortgage is relatively simple, and in a perfect world there would be only two kinds.

A variable mortgage that allows you to pay it back as fast as you can, but is subject to potential rising interest rates.

The second type is a fixed mortgage. With this mortgage you pay it back at the interest rate that existed when you first agreed to the mortgage.

You also pay back the amount of principle agreed upon by you and the bank for a set amount of time, either one year or several. After which time you’d negotiate a new deal, along with the current interest rate of the day.

In my mind a variable rate is preferable, because I believe that everyone should be paying back their loans as aggressively as possible. Once paid off, a house is an incredible asset that either saves you thousands of dollars a month in rent, or makes you thousands of dollars if you’ve rented your house out to others.

The faster that debt is gone, the quicker that house could be supporting your lifestyle as passive income.

However this isn’t always possible, as the expenses of everyday life make funnelling all your money into your mortgage impossible. In that case we should choose a fixed rate, and making sure that it’s as large as we can possibly afford.

The more we’re paying back every month, the quicker that mortgage can be paid off.

The third type of mortgage really shouldn’t exist, because it only serves as a guaranteed way to ensure the bank wins.

The War

Believe me when I say, a mortgage is a war between you and the bank. The winner of this war is the side that ultimately makes the most money off the investment. You win by paying it back in record time, they win by keeping the loan alive for as long as possible.

A bank will offer you an interest only mortgage for a certain period of time, in some cases as long as 5 years at a time.

They say that this will allow you to pay them back less every month, and will allow you time to build your family and strengthen your finances. To investors they’ll say that this type of mortgage will allow you to have cash flow right away, so that you can immediately profit off your investment.

What they’re not saying is that your mortgage ultimately must be paid off, and that you’re paying them thousands of dollars a year (sometimes tens of thousands) just to delay the inevitable.

They’re also not telling you that the life of the loan can’t be extended, so once the interest only portion is finished, the amount of principle that needs to be paid back each month may be a lot more than you can afford.

They’re also not likely to extend the interest only portion of the loan because the longer they play that game, the more likely they are to bankrupt you later.

They say the best vampires don’t bleed their victims dry, but give them the strength so that they can bounce back – only to be fed on again – Dwight Schrute

The Ultimate Misconception

People are seeing the small repayments that need to be paid back in an interest only mortgage as a good thing, rather than something to be avoided. It’s because people see their mortgage as a bill, rather than an investment into their future.

They’re not seeing that every dollar put into the principle of their mortgage will repay them several times over once the loan is finished.

Remember, the longer you have your mortgage, the more the bank wins. The more the bank wins, the more their fat-cat executives are able to reward themselves with multi-million dollar bonuses.

Take out the fixed rate mortgage you can afford, and make sure the monthly repayment is as large as you can afford (to tackle the principle head on).

Make sure the term is only for one year. This way, each year (once the loan renews) you can make a one time voluntary payment towards the principle. You should be saving up every year for this occasion so that you can make this payment as large as possible.

The faster its paid off, the better off you’ll be. Don’t stress about falling housing prices, because your paid off house is an investment that will pay you an income until you die. You should be stressed about interest rates though, and making sure you’ve escaped their clutches as soon as possible.

If you’ve bought a house you’ve entered the war. Make sure you fight to win.