YOUR OWN HOME

HOW TO MAKE IT HAP­PEN

Finweek English Edition - - FRONT PAGE - BY GLENDA WIL­LIAMS

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

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