Buying a property is not only a financial commitment that anchors you to a monthly mortgage repayment, but it’s also a significant shift in a buyer’s life, likely to see them through the next 25 to 30 years.
Each decision will be made with the mortgage in mind; do you book the flights to Europe? Is it the right time to make a career switch? Or renovate? How about tapping into your current property’s equity to buy again?
Yet considering the extent to which a home loan will shape what’s to come next, from a simple purchase to a memorable experience, emotions are the first to want to surface, and they can go on to dictate the entire decision making process.
From being able to influence why a buyer has become drawn to home ownership, all the way through to how they will justify their innate desire for a specific property, an emotional response can be a powerful force, too often buckling itself into the driver’s seat.
But according to Ben Nash, founder of Pivot Wealth, remaining cool, calm and level-headed is imperative if a buyer is to make an informed, future-proof purchase.
“One of the biggest things when it comes to property, it that it’s an emotional purchase, because when people start buying a property, they will start thinking about how they will feel being in the property, how they are going to deck it out, and if they have a family, how it is going to fit in with the family,” shares Nash.
“It generates all these emotions, so it’s hard to not let those emotions get in the way. Also, with investment properties, people will fall into the trap of thinking about who is going to rent the property and what type of person they are going to be.”
The psychology of buying a home
CoreLogic spotlights ‘7 Things Home Buyers Consider’ in an infographic titled: ‘Understanding The Psychology Of Buying A Home’. It concisely details the different factors that can psychologically influence a buyer into wanting to joust out the rest of the buying competition and snap-up the keys.
‘Emotion’ was listed first in the infographic, followed by ‘a home that tells a story’; being when the previous owners divulge their experiences of living within the home, which can go on to spur the prospective owners with day-dreams of what their ideal lives might also look like once they’ve moved in.
However, Nash advises buyers to refrain from getting too carried away with superimposing themselves into the space.
“People shouldn’t be led by their emotions. Especially with investment properties, buyers shouldn’t be led by where they think they would like to sell or what sort of property they would like to live in,” he says.
“For your own home, you want to imagine yourself in the house, but you don’t want that to be the driver of the purchase. You need to look at the impact of time.”
Buying into a location has always been hot on a buyer’s agenda, but lifestyle has become just as valuable, also pin-pointed in CoreLogic’s infographic as ‘the vision of an ideal lifestyle’. The perceived or anecdotal evidence of a region’s lifestyle can predominately weigh on a buyer’s decisions, even more so if they happen to have a family, want to become part of a region that nurtures a community spirit, or carry the desire to live close to the beach.
The buyer being able to deeply understand the life changes that need to take shape if they are to enter into a home loan are just as important as the new lifestyle benefits that they have their eyes set on. Appropriately moulding their circumstances and finances well in advance, so that they are able to comfortably tend to a home loan, when the time comes for it, is the fundamental groundwork that’s needed to avoid a lot of unexpected problems from developing further down the line.
“If people haven’t reached, or considered the type of lifestyle that they will need to be living whilst tending to a home loan, they may come to realise that they don’t have the finances to be able to do it, so they find that they have to make lifestyle sacrifices or make financial sacrifices, both of which can be stressful,” Nash says.
“They don’t take the time to look ahead and say, ‘okay, my repayments will be this over time’, especially when people are thinking about having a family and time out of the workforce. It’s all pretty common that people don’t plug in all the numbers into the property purchase. They just give it a rough calculation, and that can definitely lead to a bunch of problems.”
And by advising buyers to take into account “all the numbers”, Nash places as much emphasis on a buyer understanding the financial costs of the here and now, as much as what their mortgage repayments and other finances could look like years from now, or throughout the total life of their home loan.
A question of perceived value
Tracking back to CoreLogic’s infographic, the other factors that can give rise to an emotional response or purchase include ‘perceived value’, which for example, can be a budget-friendly coat of paint that instantly makes the space appear expensive to the buyer.
‘Cultural superstitions’ was another emotional driver, wherein a buyer makes their decision heavily based on avoiding a certain layout or door number because their culture considers it to be bad luck. The first impression, and ‘social proof’, otherwise known as personal recommendations, were also pin-pointed by CoreLogic.
“I have seen people make, I wouldn’t say impulse decisions, but decisions where they don’t have complete clarity of the financial impact of their decisions, and the impact on their financial situation post the property purchase,” Nash says.
In addition to the standard variable interest rate taking a hike – which can increase both the monthly repayments and the total amount to be paid on the loan – other fluctuations can come into play, just as effectively influencing how the buyer will tend to repayments and how quickly they are able to pay down their home loan.
In the case of interest-only home loans, what some buyers don’t diligently plan for is the day the loan offer will eventually convert into a standard variable loan, which is when both the interest and principal repayments will kick-in, generally effective within one year from the loan being taken out.
Whilst an interest-only loan can help to ease a first-time home buyer into mortgage repayments, buyers should remain attuned to how certain loan products could behave over time, rather than quickly being convinced by the initially low mortgage repayments.
That kind of forward planning takes a certain level of confidence; a willingness to pursue independent research, ask the right questions, and absorb knowledge on how certain home loan products react over time, including what factors can influence the numbers to change, and how to avoid paying too much interest – which can all be learned and soaked up by the buyer prior to them signing into the home loan deal.
When asked about the type of confidence that is required to make an informed property purchase, Nash says: “You don’t want to be over confident, but if you back up your property strategy with the numbers and an understanding what the financial side of things is going to look like, including how it will impact you, and how it will fit in with your situation over time – then I think that’s the level of ‘good confident’.”
“If your numbers are solid and you cross it and plot it out and you have a good plan around property, you can’t be ‘too confident’ there.”
A case of over-confidence
For those who don’t have that backing or haven’t taken the time to research and independently seek an expert’s opinion, Nash says being over-confident is probably not a good thing.
He also acknowledges the vast amount of home loan information that is inundating the market, making it even more important for a buyer to tap into trusted sources. Not just in finding experienced professionals, but also connecting with other buyers who were once first-timers themselves.
“You don’t want to confuse yourself, especially with property, because there is so much mixed evidence and conflicting points of view. Find someone who has done it themselves successfully or has helped a bunch of people do it successfully, and when you do that, then you’ve got a single source of truth as we say. Build your knowledge around that,” he says.
Nash advises buyers to take a moment to step away from their emotions and the information that they have been provided with, and do a simple ‘sense check’.
“You have to always take stock and ask: Does this make sense? Is it reasonable? Does someone have a hidden agenda that is driving what they are suggesting that I do? But if you do that sense check, and the numbers are working, and you build your education, it is only going to lead to more confidence and ensure that you get the best results from your property purchase,” he says.
“There’s a lot out there when it comes to property, and people can fall into the trap of blindly trusting one point of view, and sometimes getting caught up in the desire to be able to make a whole bunch of money.”
And emotional reactions into home purchases can be shaped in many ways. On some occasions running deeper than just the initial attraction to the interiors and location of a home.
At a time when social media allows people to share their life chapters and triumphs, the comparison theory has entered the vernacular, pointing towards the growing tendency for people, especially younger generations, to fall into the self-fabricated trap of feeling as though they are ‘missing out’, ‘falling behind’, or that parts of their lives are ‘not enough’.
Such thoughts can just as easily infiltrate a buyer’s mindset when they see their peers entering into the residential property market or investing in property, especially for the way in which such a life step can be indicative of a person’s income, wealth progression and career accomplishments.
“I think there is definitely a comparison with peers when people buy a property, it’s part of [social media]. But also, I think for a lot of young people today, their parent’s generation have made a lot of money from buying property and they see that as success. People don’t understand share markets, that world,” says Nash.
“So, I sometimes speak to people that say, ‘oh, I want to buy property’, and when we drill a little deeper, the reason that they want to buy a property is because they see that as being successful financially.”
Filtering your home buying approach
Considering how financially impactful a home loan can be on a household, and how drastically it can mould a person’s future choices, one can imagine what ramifications can eventuate if a buyer doesn’t have both their feet planted on the ground.
Nash, therefore, urges buyers to break away from all of their emotionally-led pulls toward ‘home ownership’, and any ideas that they have created around a specific property, starting off by blocking out the exterior noise and placing more realistic filters over their current circumstances.
“You have to understand your situation now, and how you see that progressing over time, or changing over time, and then overlay any changes to your situation, such as any significant expenses, getting married, having children, or taking time out of the workforce,” he advises.
“And then once you have that baseline, then you can overlay the property purchase and make sure that it fits with the lifestyle you want to live, as well as that you are going to be able to make financial progress beyond the property at a rate that you want.”
Some of the important questions Nash advises buyers to ask themselves when entering into a home loan includes: How quickly are you going to pay down the mortgage? And are you happy with that? What free cash is leftover for other investing and saving? What is your risk management? What if the interest rates increase by a couple of percent? What does that do to your repayments and financial budget?
Engaging with a qualified and professional mortgage broker is a good way for a buyer to break down some of their emotionally fuelled desires and decisions, as a mortgage broker can reflect on a buyer’s circumstances and goals from an outside perspective.
A financial professional is ultimately more geared toward providing a buyer with options that will best suit their financial circumstances, and fulfilling any of their emotional receptors comes second to that.
And as popular belief says, it’s always best to sleep on it first.