Five dangerous homebuying mistakes

Whether you're buying your first or your next home, be sure not to fall into any of these five traps.

The housing market is certainly beginning to wobble. Recent months have seen various house price indices report house price falls, as sellers begin to flood the market and demand dies away.

What's more, mortgage lending is falling significantly - August saw gross mortgage lending at a level unseen in that month since 2000, as we discuss in Worst mortgage conditions for a decade.

Clearly,this is very much a time for caution so be sure to avoid these terrible traps:

1. Buying in the 'wrong' area

Here's an interesting thing: if you ask homeowners whether they believe house prices in their area will rise faster than the average across the UK, the vast majority will reply 'Yes'.

However, it's simply not possible for all areas to beat the average, because the average reflects the market as a whole. Thus, some areas will outperform others.

Therefore, if you buy a house in the 'wrong' area, then you could see limited, or even negative, house-price growth in the years to come. Some wise old heads say that it is better to 'buy the worst house in the best area than the best house in the worst area'. This is because you can improve a single house, but you can't upgrade an entire neighbourhood.

So, the 'location, location, location' mantra will always ring true.

2. Tiny deposits

It's not that long ago that you could borrow 100% (or even more!) or the property's value when buying it, without needing to put a single penny down as a deposit. The risk here is that in reality you don't own a single brick of the home - the whole shebang is owned by your mortgage lender.

While 100% mortgages have now died a death, it is still possible (albeit difficult) to buy a property with a small deposit of 5-10%. However in order to have a decent stake in your home, you need house prices to rise, and they don't always do that. After peaking in 1989, house prices slumped and only began to recover in the late Nineties. During this downturn, many homeowners went into 'negative equity': their homes were worth less than the loans outstanding on them. The people worst hit by negative equity were those who didn't put down a deposit and, instead, borrowed up to the hilt.

If you can't afford to save a decent deposit, it might not be a good idea to buy your home.

3. Borrowing too many times your salary

In most decades since WW2, a typical house would sell for roughly 3.5 times the average annual wage. However, our decade-long housing boom has pushed this ratio to six times salary, and even higher in some areas.

In the past, it was considered unwise to borrow more than, say, 3.5 times your salary, but during the boom years frantic buyers were willing to borrow four, five, six, even seven times their incomes in order to reach the next rung.

This was insane, because overstretched borrowers left themselves vulnerable to interest rate rises, as progressively more of their take-home pay is gobbled up by mortgage interest.

Don't load yourself too heavily with housing debt!

4. Choosing the 'wrong' mortgage

When it comes to home loans, the British public is spoilt for choice. With dozens of different lenders, and thousands of mortgages to choose from, the UK mortgage market is perhaps the most complicated on Earth. Yet, despite this huge array of choices, many aspirant homebuyers simply go to their local bank or building society for a loan.

Thus, although millions of Brits have got into the habit of shopping around online for financial products, loyalty still drives some folk into the arms of their existing financial partners.

This is potentially a very expensive mistake. Be sure to take advantage of lovemoney.com's innovative mortgage centre, where you can find the best mortgage for your circumstances, as well as take advantage of some independent advice absolutely free.

5. Buying at the top of the market

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One way to enjoy poor returns is to buy at a time when prices are high. And while property prices fell during the credit crunch, it wasn't to the degree that many expected, and there is still plenty of room for further house price corrections.

Indeed, the ingredients are all there for another round of significant house price falls, as detailed in Secret new rules set to reduce house prices. Don't be surprised if we soon embark on round two of the great property price crash!

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