YOUR OWN HOME
HOW TO MAKE IT HAPPEN
SAVING FOR A DEPOSIT
THE HIDDEN COSTS
BUYING VS RENTING
Buying a home is probably the single biggest f inancial commitment for most of us. And while it is also a very emotive decision, for many aspiring homeowners it is often as much about putting a roof over their heads as it is about sinking their hard-earned cash into a bricks and mortar asset.
Yet, not all of us will be able to tread that path, which has always been dictated by affordability, determined in turn by income and other factors such as interest rate, credit rating and deposit.
Affordability, it appears, is poorly understood. “The biggest challenge with t he affordabilit y assessment does not l ie with t he assessment process, but rather with the customer’s interpretation and understanding of their own personal financial situation,” s ay s Carel Grönum, managing executive of Absa Home Loans.
Says John Loos, household a nd property sector strategist at FNB Home Loans: “If you want to buy a property, you need to get a grip on what your real home costs are. It is not just about paying a bond. It’s about the rates and tariffs bill; it’s about maintenance, insurance, security, and so forth. And something that also needs to be taken into account is transport cost versus property costs.”
Failing to take into account all costs that impact disposable income, as well as neglecting to plan for inevitable inf lationary and interest rate increases, frequently results in over-commitment and the potential loss of the home, something banks are at pains to avoid. After all, that bricks and mortar asset is probably the largest single investment most of us will ever make and one that needs to be protected.
WHAT PERCENTAGE OF INCOME SHOULD BE SET ASIDE TO PAY FOR A HOME LOAN?
“The standard percentage that has been used over quite a long period is 30% of the customer’s gross monthly income,” says Ewald Kellerman, head: customer interaction, Absa Home Loans. “This is a guideline that can assist customers when determining the price range that they should look at for t heir new home. It is also important to take cognisance of t he purchaser’s own ci r c u ms ta n c e s an d lifest yle. A better measure is to consider net disposable i ncome a f ter al l deductions and expenses.”
Where customers have intentionally withheld i nformation relating to t heir i ncome a nd e x penses, not only could they f ind themselves in a challenging f inancial position if a home loan is granted, they will str uggle to f i nd protection under t he NCA, c aut i ons Kel l er man. The key is to purchase within your means. And that also means not relying on salary increases or possible future income to bump up your affordability limit.
THE DEPOSIT – HOW MUCH DO YOU NEED?
A minimum of 10% to 15% of the property purchase price should be the target that customers set themselves when considering the purchase of a home, says Kellerman. “If the customer has the ability to place a larger deposit and does so, it will arguably be one of the best f inancial decisions they can make as a homeowner,” he adds.
A deposit positively inf luences the application’s chance of approval. “With a deposit, t he home loan amount applied for would be lower, thereby reducing t he required monthly instalment and positively inf luencing affordability factors for the applicant. Along with this, a deposit into the home loan can positively inf luence the interest rate applicable to the loan, i.e. the larger the deposit, the more favourable the rate concession – another positive for the customer when looking at the total interest over the full period of the loan.”
TAKING FUTURE COSTS INTO ACCOUNT
Given that i nt er e s t rates a re comparatively low compared with those
THE KEY IS TO PURCHASE WITHIN YOUR MEANS. AND THAT ALSO MEANS NOT RELYING ON SALARY INCREASES.
some years back, a further increase of 0.25% later in the year is not unrealistic. Prospective homeowners should be factoring in possible interest rate hikes when determining future affordability, says Kellerman. And while some banks factor in a small buffer to help protect customers against future rate increases, Kellerman says it is important to remember that it is not only the home loan instalment that increases, but also other account facilities like vehicle finance.
For those homeowners unwilling to expose themselves to f luctuating interest rates, a f ixed rate option may be more to their taste.
IS COMPROMISE NECESSARY TO FIT YOUR BUDGET?
Compromise is not high on the agenda of those looking for their dream home. Whether it is compromising on location, where buyers are likely to get more bang for their buck, or compromising on size or that list of must-haves, something has to give if your budget will only stretch so far.
“The clichéd adage of location, location, location is still as relevant as ever in today’s property market but affordability ultimately determines location,” says Dr Andrew Golding, CEO of the Pam Golding Property Group. “When affordability impacts location requirements, a complex and often challenging decisionmaking process comes into play. Is lifestyle more important than access to the best schools? Are transport considerations more important than proximity to extended family, and so on? One has to carefully weigh up relative priorities and make the best possible decision having considered all options and variables.”
Sometimes it works well to temper requirements and buy a smaller property to get a foot on the property ladder in the area you desire. It has worked well for many people who have paid off a chunk of their bond and moved to something bigger later when, for instance, they have established a family. Prospective homebuyers are frequently fixated on a specific location, ruling out locales that border their preferred areas that are often more affordable. “Looking on the fringe is not necessarily a bad thing but make sure it is not costing you more,” says Loos.
“If you can’t afford t he one in your desired area, are you sure you can afford the one on the fringe if it comes with a huge transport cost? If the one on the fringe costs more with transport costs, then the one in the desired area is the better option.”
In pursuit of their ideal property, buyers al s o f r equently discount properties requiring upgrading or renovating, but properties such as these often present a good deal for buyers with constrained budgets.
Absa’s Homeowner Insights report found that affordability accounted for 22% of home loan applications being declined. And more than a third of the respondents who participated in the survey had to reassess their needs once they started identifying suburbs and viewing properties they liked.
Weighed against i nternational standards, residential property in South Africa still remains relatively affordable. According to FNB’s Property
Barometer, house prices were growing at around 8.6% year-on-year in December 2013 but gradually slowed to 4.9% in August 2015. That shift to a slower pace brought about by factors such as interest rate hikes and slowing economic growth could mean that, while a cautious approach should always be adopted when committing to a major financial investment, now could be the time when a better deal could be bagged.
Clifton luxury villa An über-luxury villa in Clifton doesn’t come cheap. This one sold recently for R111m – cash! Over 70% of all transactions on the Atlantic Seaboard over the past year have been cash deals, translating to a cash investment of just over R3.97bn.
John Loos Household and property sector strategist at FNB Home Loans
Dr Andrew Golding
CEO of the Pam Golding Property Group
Ewald Kellerman Head of customer interaction at Absa Home Loans