It’s a well-known fact that taking on finance to buy a home is one of the biggest financial commitments most of us will ever make. But planned carefully, it doesn’t have to be intimidating, or life changing. Relatively few people are in a position to buy their dream home outright, so banks have a developed a wide range of products and services for would-be homeowners.
Before you even begin to house hunt, it’s vital to work out exactly how much you can afford — and to stick to that limit. That “dream” home can quickly turn into a nightmare if you’re constantly struggling to make payments on it. Ideally, your housing costs shouldn’t exceed a quarter of your monthly income, and 35 per cent should be the absolute maximum. As home finance is measured in terms of decades, think carefully about whether you’re prepared to own the property, and therefore the obligation, for the long term. Is the home in an area that you’ll be happy to stay in for years, with good schools for present or future children? Will you still be able to afford the monthly payments if your financial obligations or goals change?
Given what’s at stake, it pays to seek professional advice when buying a home. A good bank will be able to explain to you clearly all your home finance options — and there will be many — and they will be able to steer you towards those that are most appropriate to your circumstances. Similarly, a good real estate agent can be a valuable ally in the house hunting and purchasing process. Also, try asking friends or family for personal referrals.
Do not be easily tempted by those “teaser rates” for home finance. It pays off to really understand all the details behind what looks to be an attractive headline rate, just in case it becomes punishing after the introductory period. Sometimes this can be just for a year — what happens then? Rates are variable but you must be able to understand what will be your rate, say, two years from now as that can really impact you significantly.
Financial conditions can change and you can find repayment rates on your home finance rising. For this reason, it’s a good idea to consider fixed-rate financing if it’s available. The predictability it brings can help you plan your finances in the longer term better.
One of the best principles you can follow when it comes to home financing is to reduce your commitment — that is, reduce the amount of your outstanding finance — by whatever means possible. Don’t go for the lowest possible down payment option if you can afford more — by paying more initially, you’ll lower your monthly payments. You can also pay your house finance off faster and save money by making occasional lump sum payments or increasing your regular monthly payments, if you’re in a position to do so. On the other hand, if you’re having difficulty making your monthly payments, talk to your bank as soon as possible so you can work together to find a solution.
The writer is the head of marketing at Abu Dhabi Islamic Bank. Views expressed are his own and do not reflect the newspaper’s policy.
