plonkee money an english-er's thoughts on personal finance

August 8, 2008

taking on debt: do personal or market forces rule?

Filed under: credit and debt — Tags: , , , — plonkee @ 1:33 pm

Now is a great time not to be looking to take on more debt, because it’s harder (and more expensive) to come by, due to the credit crunch.

On the other hand, in your own personal circumstances, when is it a good time to take on debt? And should you take into account the external market?

taking on a mortgage

About 18 months ago, I put in an offer on a house. I had just received a windfall that meant that I had enough money for the deposit and fees. I had a good mortgage offer – a 2 year fixed rate deal at 5.48%. My personal life was stable, I had a good job, had plenty of experience of living on my own, and was ready to commit to living in this area for the next 5 years or so. Personally, it was a good time to buy.

On the other hand, if you’d asked me then what I thought was likely to happen to the housing market, I would have suggested that it was probably nearing a peak. I thought that interest rates were likely to go up, and I didn’t particularly think that this was a good time to buy, if you were looking that the market.

I bought anyway. I didn’t like where I was renting, I didn’t want the expense of moving and then moving again in a couple of years. I was slightly worried that I might fritter away the windfall. I wanted to live somewhere that made me happy. I wanted a place of my own to decorate.

Although I got an ok deal on the house, with the benefit of hindsight I probably spent about £5k more than I needed to – the market wasn’t moving as much as I thought. It took nearly 6 months for the purchase to complete. It was quite stressful, and although now I really, really like my little house I’m aware that there’s an excellent chance that it will fall into negative equity in the next year or two.

other debt

Taking on a mortgage isn’t the only debt that you might incur where your personal circumstances and market forces might not be in sync. Now might be an excellent time to return to study for you personally, but is it a good time to be leaving the job market? If you’re trying to change or upgrade your career, what will the market for that be like in a couple of years time?

There’s probably never a good time to take on consumer debt really, but what about buying a car. If you need or want to get one now, you’re likely to find that interest rates are higher than you might like.

Should you postpone purchase that require debt until market conditions are better? Or should you put your own needs and circumstances ahead?

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