The Property-Buying Test

It's hard to know when to make the leap on to the bottom rung of the housing ladder. (Who put it that high anyway?) Here are three simple tests that could help.

There's no simple equation that will answer for everyone whether, and when, we should buy a property. There are so many variables, such as your income and expenses, the mortgage you can get, your attitude to risk and your ability to handle stress. However, there are some simple tests you can do to help you buy when the time is right.

1. Can you afford it?

It's a simple question, but one which is overlooked by many buyers. Just because property is a good investment, it doesn't mean you should buy now and at all costs. Assess your income and expenses to see what monthly mortgage payments you could afford without too much stress.

Many brokers and mortgage companies now talk about using your 'future expected earnings' as a measure, as they believe that a relatively short period of tight finances is manageable for most people.

I know several young buyers who knowingly took this gamble, so it's a judgement call for you. You have to ask yourself how certain you are of increased earnings, how soon the increase will happen and if you can handle it were things to go wrong. Most importantly, make sure your budget is not too tight in the short-term. It could be dangerous if you're driven (further!) into debt.

2. Do you have a suitable deposit?

You can get better deals if you have a sizeable deposit, but you can still get mortgages with no deposit or a small one. A Fool with an average-sized mortgage and a 5% deposit might pay roughly £2,500 less over three years than a Fool with no deposit. However, if you spend years saving a deposit you may find that the property has gone up so much in value that you pay even more anyway.

The answer for many people is to not try to predict the market. Keep an eye on your finances and house prices, and buy when you can, deposit or no.

3. Can you handle an increase in interest rates?

You need to be able to handle interest rate increases. Even if you're after a fixed-rate mortgage, if it's just fixed for a couple of years you may then find that interest rates have risen by, say, 1%. Could you handle an extra £100 or £200 per month?

Remember too that a succession of interest-rate rises might slow, halt or even reverse the housing market. If this happens and you can no longer afford the monthly payments, you may find that you make no profit on the sale, or even a loss! Then you could be saddled with the dreaded negative equity that was so prevalent in the early 90s.

And in conclusion...

Decades of past data show that property is a good long-term investment and buying early will probably save you more money in the long run. However, you have a life to lead in the meantime, which should be as stress-free as possible. It's all about balance. If you can't afford the money or stress, then don't buy, but keep saving and keep looking for bargain properties. You'll know when it's time.

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