In the last week I had 2 couples come in and while their objective was the same in wanting to buy their first home - their situations & recommendations were totally different. This was made apparent after completing a budget with them to see if their current lifestyle would accommodate the level of loan repayments that they would take on in order to secure the purchase of their new home.

The first couple were on a good income an obviously enjoyed a great lifestyle. The knowledge of where and how they spent their money did not seem to be a high priority. The second couple survived on one average income coming in to the household. They were thrifty and lived within their means.

As usual I suggest to both sets of clients that they seriously consider one of 2 things – either altering the loan to fit their lifestyle OR altering their lifestyle to fit their loan.

Based on standard lenders’ criteria the first couple could afford a higher loan amount but if they took a loan of that size on and continued their existing lifestyle they would, in a very short time, get themselves in to trouble. The second couple could not make any further compromises to their lifestyle because they were already living quite frugally. So they would have to lower their loan in order to accommodate their lifestyle.

In a way – and it pains me to say this – our parents were right. In our parents day you had to prove that you were a worthy candidate for a lender – almost always a bank – to offer you a loan to buy a house. You had to show that your lifestyle could accommodate the new loan. That was by way of saving for a deposit, not having any existing external debts, saving up for purchases instead of putting them on hire purchase and if you did have some debts you were sure to pay them on time and clear it as quickly as you could.

Modern times have have seen lenders relax these lending criteria, which given the cost of housing, was necessary really, but it also has meant that the generation who are purchasing their first home today have not had to prove the same financial discipline our parents had to show.

Financial discipline acquired now can so often provide a lot more opportunities in the future. We accept this in regards to our education. We are prepared to invest time, effort and money into acquiring qualifications so that we can secure a profession that can earn us an income to live off. What we don’t seem to put so much effort in to acquiring is Financial intelligence so that we can jolly well hold on to what we’ve worked so hard for!

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I’m not referring to investing in the share market or wheeling and dealing in property or building a nationwide franchise - I’m talking about basic Financial discipline. Some of the wealthiest people I know have the most balanced Financial discipline. They have made their money – worked hard to clear debt and are in a position that they don’t ever have to work again. But they are still conscious of where their money is spent and that it is not frittered away. They treat themselves to their new toys, lavish houses etc but they don’t fritter away their hard earned cash and are sure they get the best return for their dollar.

We can learn this financial discipline and adapt our lifestyle so that when the time comes we know that we are able to take on debt that we can repay even in the current economic climate.

The first thing that first home buyers really need to do is examine where they spend their money. Do a budget and see where you spend your money. How much exactly do you spend on your phone, power, fuel etc. Have a look at how you can make savings – are their “plans” that you could put your phone account on that better suits your lifestyle, are their watchdog devices such as electricity metres that you can monitor how much you spend on your power? Are there more efficient heating methods that you could use to reduce your power bill?

Without a doubt the biggest outgoings for today’s generation are debt and entertainment. So often we are told – “why wait – buy now and pay later”. We have the mentality that life is for living now and we should live it up to the max. Which is great but why does it have to cost so much MONEY!

Often debt is a requirement of today’s living. We need a car to get to work, we need a student loan to get an education. But while we take it for granted we will have those things for many years to come we don’t make it a priority to clear these debts as quickly as possible. You do have the ability to ask for loan repayments to be increased so that they can be cleared quicker - do it. It is probable that you won’t even notice the difference on those increased payments but you will notice when you pay your car loan off a year ahead of time and can use that extra cashflow to put towards payments on your own home.

Entertainment – well there’s no way you’re going to tell some 22 year old that 5 trips a week to the pub is not an essential living expense but if you can drop this down to say once a week the savings would be huge. Instead of every second weekend away make it a real treat and take every second month a real special occasion. Instead of hiring DVDs every couple of nights get a package that will allow you to take out DVDs at reduced cost and cut it back to once a week.

The savings in these areas are almost unlimited and could be used to decrease debt and/or increase savings. By the time it comes around to purchasing that house not only would your external debts be gone or down to a minimum you could have some substantial savings thus reducing the loan amount required to purchase your new home. On top of that you have already learned the spending habits that will accommodate the new loan repayments and can simply sit back and enjoy the real thrill of owning your own home.

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Courtesy:
http://www.ohaganmortgages.co.nz/

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