Whatever your views on residential property as an investment, it is true that most people earning a decent income will aim to buy their own home. For many, this will be the largest financial transaction they will ever make. Before taking such a big step, consider these points to help you decide if you are financially ready.
Have you got a deposit saved?
It is unlikely that the banks will give you a home loan that covers the entire purchase price of the home. They normally ask you to put down a deposit and it is likely to be 20% to 25% of the value of the home. Having the deposit saved will give you some negotiating power with the bank to obtain the best interest rate possible. Your negotiating position should improve as the size of your deposit increases. Saving for your deposit should be the first goal before buying your home.
Can you pay for all the property transaction costs?
In addition to the purchase price of the property, you will also need to pay some transaction costs when buying the home. One cost is a tax called transfer duty and the other cost is for registering your mortgage. This is charged by lawyers and is called a bond registration fee.
The transfer duty on a home would depend on the value. Here are some examples:
R 800 000: R 1 500
R 1.5 million: R 30 000
R 5 million: R 387 500
Bond registration fees vary but here are some examples:
R 800 000: R 17 348
R 1.5 million: R 24 237
R 5 million: R 50 842
In addition to these costs you might need to pay for movers and have money for any maintenance that needs to be done on the property.
Have you got an emergency fund?
Once you have moved in, it is likely that you will not have a lot of extra money left over. This means your first few months in your new home are likely to make you vulnerable to any financial shocks. If your geyser bursts and you need to pay an insurance excess or if you need to replace a damaged car tyre, it is important that you have access to money to cover this cost. This is where your emergency fund comes in. You should have at least three months’ worth of your normal monthly expenses saved in a money market account or as an extra amount in your access bond. Your emergency fund is important as it will prevent you from having to incur expensive debt at a time when you can least afford it.
Is your source of income relatively certain?
It is impossible to be 100% sure of your job security but you should definitely not buy a home if your employer is going through difficult times and there is a prospect of cutbacks in the near future. Similarly, if you work on contract or as a consultant, try to ensure that you are reasonably sure of earning enough income to cover your expenses over the short to medium term. If you lose your job soon after buying your home and are not able to repay your mortgage, the bank could take over your home and sell it to recover their money. If your earning prospects are uncertain, rather build up a bigger deposit and a larger emergency fund that can cover you for 6 to 9 months, which should be sufficient time to get a new job or sell the house.
Don’t forget that you will have additional monthly costs when you buy your home. You will need to pay property taxes or levies, insurance on the property and life assurance to cover the mortgage. At some point, you will also need money to pay for maintenance costs. Even if you live in an apartment, you will need to repaint the inside of your home and possibly fix broken cupboards or appliances in the future. It is important that you have a budget for this.
Do you plan to stay in the property for 8 years or longer?
Many people buy their first home with a clear plan to stay in a small, low cost place until they can afford a larger place. Very often their plan includes moving at least three times: your first home when you are single, three or five years later buying a slightly larger home with your spouse and finally a multiple bedroom home for when you have children. If this sounds like your plan, you should not buy a home. My reasoning is that the transaction costs of buying and selling these properties will set you back financially. Rather continue to rent until such time as you find a home that you will live in for at least 8 years or longer.
Are you buying in the best area you can afford?
The position of your property is possibly the most important consideration when buying a home. You should always try to buy a home in the best neighbourhood you can afford. If you have a choice, rather buy the worst house in the best area not the best house in the worst area. If you buy in a great area, it is likely that your neighbours will maintain their properties, be active in maintaining the area and be willing to spend money on improvements when required. We often see this with initiatives such as private community security and initiatives to maintain suburbs where local government is not functioning.