With the advent of 100%+ mortgages, borrowers these days find it easy to borrow the money they need to buy the house they want. It didn’t always use to be that way. In fact, up until the recent credit boom, borrowers were required to pay a deposit on the house from their own savings. In fact, in Taiwan, it is still this way. For new houses and pre-construction units, the deposit is actually between 10%-20%, but for second hand units, it is typically 30%-40% of the sale price.
When my wife and I first married, saving any kind of deposit was quite difficult, because we were starting from nothing. We had nothing in the bank after our wedding; so purchasing any property was simply out of the question. If we had been living in the UK or US, it would have been quite simple to go out and borrow the money for our house, our furnishings, and everything else we needed for the house.
Looking back, though, I realized that the fiscal discipline that we learned from saving for the deposit taught us much more about how (dare I say NOT) to manage our cash, cash flow, savings and credit cards. So, today when I was chatting with my good friend, Cindy, about buying a house. She had just moved into her own apartment, and was dreaming about buying a house. But it’s difficult when you are starting out to save money, because even renting a house requires quite a bit of cash.
After I got home, I realized that it was having to save for the deposit that helped us to manage our cash flow much better. It took us over 5 years to save up enough for a house, but we did it! And, at the beginning of the five years, only my wife had a proper job!
So why? Simply, because if you can save a cash deposit, then you have learned a number of important skills for a house-holder:
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you can manage your income/expenses carefully;
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you have budgeted properly;
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you have consistently saved up money;
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you know that it’s possible to manage your money without spending it all; and,
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by committing your own money to your house, you are making an emotional commitment that having a 100% mortgage may not allow because you are risking your OWN money.
Together, these qualities are more than enough to prepare your for the task of buying and managing your own house. More importantly, with these skills, you are setting your stage for managing your finances for the rest of your life (God willing!).
In addition, when you do purchase your house, you will have a ton of advantages that you didn’t reckon on in the first place:
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lower overall mortgage rate than 100% mortgage;
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lower overall mortgage payments vis-a-vis if you had paid for the house in a 100% mortage!
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a better credit record because you’re not overleveraged;
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you’re not overleveraged;
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in a tough seller’s market, you’ll have some more ‘protection’ against negative equity situations;
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you may even be able to use the savings habit to pay off your entire mortage much sooner saving a lot of interest payments over the term of your mortgage!
So, if you are forced by circumstances to save for a deposit for your house, look on it as an opportunity not a burden! We learned a lot… Seize the chance to save! No matter how hard it is for you to cut back, it will be worth it in the end.
Did you have to save for a deposit for your first house? How much was it? Was it difficult or easy for you to get it together? I’d love to hear how you