A cautionary tale...

Should you really take out the biggest mortgage they'll give you?

Sunday, May 9th 1999, 12:00AM

by Paul McBeth

Before you rush out and borrow to the max, please read this!
Should you really take out the biggest mortgage they'll give you? It's not fashionable to say so, especially as New Zealanders tend to view home ownership as a basic right, but you should be dead sure you can cope with the size of the debt and that you've covered your other risks.
For example, what happens if the mortgage lender has based its calculations on your joint incomes and then one of you stops work to have children? What if you lose your job, get sick or even die?
Less dramatically, is all your money likely to go on mortgage repayments or have you enough left over to shell out for educating your children, for making a start on your retirement savings programme or for sudden emergencies?
As Lindsay Hore, a mortgage broker with Forsyth Barr puts it, "lenders will give you an umbrella when it's fine and take it away when it's raining".
Hore, who has ten years experience working directly for banks, says that mortgage lenders generally look at 30% to 35% of gross annual income "on however many incomes are available at the time". As far as mortgages go, "if it fits within their criteria, they'll lend it."
He says that buying a house is usually the most emotional of all the financial decisions people ever make - and they don't want to hear the negatives.
"There's a danger that people overcommit, probably thinking along the lines that it won't happen to me, and don't protect themselves from the downside.
"But there are people who've had to sell their house within six months of buying it."
Raewyn Nielsen, of the New Zealand Federation of Family Budgeting Services, recommends getting some financial advice and help with long-term projections before taking on a large amount of debt.
The Federation provides a free service nationwide through its Budget Advice Services and Nielsen says they deal with a lot of people facing problems repaying their mortgages.
"We're also seeing people getting made redundant and losing their homes," she says.
"People should go to budget services earlier on - most don't come in and see us until they're in a mess."
Aside from some long-term number crunching to make sure that paying back debt won't be the only thing you'll be doing into your retirement, it pays to consider some other scenarios before stretching yourself for that dream home:

What if you start a family and drop to one income? Could you still make the repayments, or are you able to extend the term on your mortgage for the meantime?

What if you become ill and don't earn for a while, you lose your job, take a lower paid job or start a new business? If you haven't already done so, consider mortgage protection insurance or income protection insurance.