If you are thinking of investing in a property, and giving up on paying rent, great! But before you take the big step, read this to make sure that you know what you’re in for.
You need a deposit
Although it is possible to get a 100% bond when buying a home these days, your chances of bond approval are much higher if you have managed to save up a deposit. Aim to save 10% to 20% of the purchase price, but if you see the home of your dreams before you’ve managed to save up, you can still try your luck with a bond application – you could get approval. Saving for a deposit is also good discipline and a good habit to prepare you for the financial commitment of paying a bond.
The general rule is that you should spend no more than a third of your current net income on bond repayments. You can use an affordability calculator like this one to work out the total purchase price you would most likely qualify for based on your income and expenses. You can also work out how much your bond repayments will be on that purchase price with this calculator.
Remember, it is a good idea to buy a property that’s worth less than the amount you qualify for because the future is uncertain, and the lower you can keep your monthly repayments, the more financial flexibility you will have.
The prime interest rate (the base rate at which banks lend money to consumers) is currently 10.5% per year, but first-time buyers are likely to get a higher rate than prime. Because of this, it’s a good idea to apply for a home loan through a bond originator, which will apply to all four banks simultaneously for you. This means that you can select the bank that offers you the best interest rate, which will make a huge difference over the 20 years that you are paying back your home loan.
Also, be warned that with South Africa’s current sub-investment grade (junk) status, interest rates are likely to go up in the near future, so be aware that your monthly repayments are likely to go up soon.
It’s advisable to arrange to have an access bond which allows you to pay extra into your bond each month. In this way, you will get into the habit of paying more, so that if rates do go up, you can manage, and if they don’t, you are saving on interest by paying more each month.
Transfer duty and notary fees
When you buy a house, you have to pay transfer duty, which is a tax to government, and conveyancing fees, which are the lawyer’s fees for processing the change of ownership. Transfer duty and conveyancing fees are calculated on a sliding scale, but you can negotiate the conveyancing fees with the transfer attorney. There will also be bank fees for the origination of the bond. You can calculate the total costs of all these fees here.
Recently, there has been one bit of good news, and that is that homes that sell for under R900 000 will attract no transfer duty, so if you are house hunting, try to look in that price bracket to save yourself some cash.
If you need to take occupation of your new home before transfer goes through, you will have to pay occupational rent. The monthly rental amount is agreed in the offer to purchase, but is usually 1% of the purchase price. Obviously, if you are paying occupational rent, you won’t be repaying your bond, so you won’t be making a double payment.
Rates, electricity and water
When you move into your new home, you visit your city council to sign up to receive the electricity and water bill. You will be required to pay a deposit for water and electricity services. Your rates and taxes bill is automatically transferred into your name on transfer. You should find out from your estate agent beforehand what your rates will be, so that you can budget for that, and you can ask the previous owner or your new neighbours with similar properties what their electricity and water bill usually is.
Remember, if there is some delay at the council, you might not get a bill for the first couple of months, but make sure that you put away the estimated amount anyway, so that you don’t come up short when the bill does come through.
If you have bought into an apartment complex, you will also have to pay a levy for the upkeep of the property.
The hidden costs of ownership
Finally, it’s important to be aware that owning a home comes with a lot of maintenance costs. You have to spend the money to protect your investment, so be prepared to keep a garden going, repair a roof, paint the walls, call in a plumber, call in an electrician, repair hanging cupboard doors, replace broken floor tiles, and so on, in the years to come. You should start a home maintenance fund so that you have the cash for all these expenses when the time comes. Don’t let your new property deteriorate because you don’t have the money.
Good luck and happy house hunting
While all these costs may make home ownership seem a little daunting, it’s good to have this kind of reality check. Go into the process with your eyes wide open and you’ll be in for fewer nasty surprises. Buying a home and gaining a foothold on the property ladder are important financial steps for you to take – just make sure you do them sensibly and thinking of the future.
Originally published on https://www.1life.co.za/