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.

Following five interest-rate rises by the Bank of England since last August and a shocking summer full of floods, plus rising personal taxes and household bills, it's no wonder that the housing market is beginning to wobble.

According to Nationwide, house prices rose just 0.1% last month, which is the smallest rise for fifteen months. (Then again, house prices were up 10% in the year to July, which is still above their long-term trend of about 8.5% a year.)

What's more, recent falls in the number of mortgages being taken out for house purchases suggests that some potential homebuyers are beginning to think twice about pushing their finances to the limit to reach the next rung on the ladder. Hence, this is very much a time for caution so, as the Fool's resident property bear, doomsayer and all-round Cassandra, I've identified five traps for homeowners to avoid:

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. At present, 'Prime Central London' property is leading the way, while prices are falling in other parts of the UK.

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. Not putting down a deposit

With a 100% mortgage, you borrow all of the money needed to buy your home; you don't put a single penny down as a deposit. In my opinion, this is a desperate move, because you effectively don't own a single brick of your home. The whole shebang is owned by your mortgage lender.

Indeed, to have any 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.

In my view, if you can't afford to save a modest deposit of, say, 5% or more, then you shouldn't buy a home. On the other hand, if you like to live life on the edge, you go right ahead.

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 nowadays frantic buyers are willing to borrow four, five, six, even seven times their incomes in order to reach the next rung.

To me, this is insane, because many overstretched borrowers will come a cropper as interest rates rise and progressively more of their take-home pay is gobbled up by mortgage interest.

From my experiences as a court witness at repossessions (house seizures) in the early Nineties, people whose mortgage repayments exceed a third of their take-home pay are most at risk, so 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. Indeed, with over 150 different mortgage lenders and a staggering 8,500 different home loans from which to choose, 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 (using financial-comparison websites such as Fool.co.uk), loyalty still drives some folk into the arms of their existing financial partners.

Alas, although faithfulness is an admirable trait in most aspects of life, it's a grave handicap when it comes to choosing the best financial deals.

5. Buying at the top of the market

One way to enjoy poor returns is to buy at a time when prices are high. In my humble opinion, that time is now (but I've been saying that for quite a while).

As I said earlier, I'm the Fool's property bear. (A bear is someone who expects prices to fall, rather than rise.) Indeed, I've been fretting about rising property prices since 2003, and I sold my house to move into rented accommodation two years ago.

As you'd expect, I've taken a lot of stick from people who have seen their wealth rise thanks to UK property's long winning streak. However, as a reformed gambler, I know that all winning streaks eventually come to an end.

For the record, I strongly believe that now is a truly terrible time to buy property. My view is backed by two leading economic forecasters. The Ernst & Young ITEM (Independent Treasury Economic Model) Club, which correctly predicted the property boom that began in 1998, calculates that UK house prices are presently overvalued by up to a sixth (16%).

Today, credit-rating agency Fitch warned that UK house prices are overvalued by at least a fifth (20%). It cautions that after New Zealand and Denmark, the UK is the nation most vulnerable to a housing crash. Thus, unlike the thousands of vested interests (estate agents, mortgage lenders, property firms and the like), I'm not afraid to use the 'C word'. So, brace yourselves, because I'm calling a crash!

Don't just head off to your local branch. Instead, search the whole market for a mortgage which is right up your street, using The Motley Fool's award-winning, no-fee mortgage service.

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