First-time home buyers should start small with an affordable property and expand later, because interest rate hikes could be around the corner, say the experts.
Samuel Seeff, chairman of Seeff Properties, said with the interest rate low, now was a good time to buy –
but he cautioned buyers to ensure that they bought within their means, despite the low interest rate. Buyers should ensure that when there was a hike, possibly towards the end of the year, they were not over-extended.
“Most people shopping for a home have something specific in mind, but often what they can afford doesn’t match the mental picture,” Seeff said.
Adrian Goslett, chief executive of RE/MAX of Southern Africa, said that when looking for a home these days, buyers often had to make some kind of compromise between price and the home’s features.
“We would all love to be able to buy our dream home, or even build it from scratch, so that it suits our requirements perfectly. However, many are not in a financial position to do this,” said Goslett.
He said with the current mortgage market conditions and affordability factors in mind, coupled with a possible interest rate hike later this year, it would be best to buy small and then build up.
“In addition, the less a buyer spends on a home now, the smaller the deposit that will be required for payment upfront.”
Paul Barnard, a financial education consultant at North Star Solutions, said it made sense for consumers to do proper research. “It can take many years to repay a home loan so small reductions in interest rates, fees, insurance premiums and the amount borrowed can add up to a significant amount.
In addition, the date you set for your monthly debit order can also make a difference of a few thousand rand over the period of the loan,” said Barnard.
His advice for buyers to consider before applying for a bond:
* Affordability: How much can you afford to repay monthly? A general guideline is that 25 percent of your monthly after-tax income is a comfortable amount to be spending on repaying your bond. More than that may put you under financial stress. You should also always give yourself a 2 percent buffer in case interest rates rise. If your interest rate increased from 9 percent to 11 percent, your bond instalment would increase by 15 percent.
* Term of the loan: It is not recommended that you take a bond over more than 20 years, because the cost of credit becomes exorbitant for a small reduction in your monthly repayment. For example, a R500 000 bond over 20 years at 9 percent will cost you R593 000 in interest and fees.
If you repaid the loan over 30 years, your monthly instalment would drop by R476 to R4 080 – but the cost of interest and fees over 30 years is an astronomical R969 000.
* Interest rate: Your credit profile will largely determine the interest rate that you will be charged. Never apply for a home loan without first checking your credit record and ensuring it is in good standing. The interest cost-saving over 20 years for negotiating a favourable interest rate can amount to thousands of rand.
* Be aware of all the “hidden” costs: It’s not just the cash deposit that you will have to finance yourself – which could be as high as 15 percent. You will also need to have cash saved for property transfer costs and bond registration costs. Many of these costs can be negotiated and it is wise to shop around.
* Time your debit order correctly. Don’t be tempted to delay the first instalment on your bond. Often the bank will offer to delay the first instalment by one month. All that is doing is increasing the interest they are charging you. If you are paid on a certain day each month then set up your debit order repayment to coincide with your pay-day. It makes no financial sense to have money in your account earning little or no interest and your debit order is deducted a few days later.
If you are paid on the 25th of every month, then set up your debit order for the 25th and not the 1st. On a R500 000 bond at 9 percent it will cost you R616 in interest for the five days you have the money lying around, not paying the first instalment of your debt. Over 20 years, these five days each month will cost you a few thousand rand.
* Shop around for homeowner’s insurance and credit life insurance. While the bank may make this compulsory, they cannot make it compulsory to take out insurance with them. Speak to your insurance broker and shop around for the best insurance premium.
Barnard said that before buyers signed on the dotted line they should do their homework to make sure they had negotiated the best possible home-loan deal so they could sleep with “peace of mind”. - Cape Argus