The loan on your home is good debt

Not all debt is bad and some is unavoidable. Credit to finance an asset that appreciates in value, such as a home, is “good debt”.

Very few people can pay cash for a property. The vast majority of us have no option but to obtain a home loan. But in order to qualify for one, you need to put down a deposit. The bigger the deposit, the better positioned you are to negotiate with the credit provider for a low interest rate.

According to a press release issued by estate agency RE/MAX this week, in June, the average first-time buyer put down a 20percent deposit. Considering the average purchase price was about R860 000, that equates to a deposit of about R182 000.

Adrian Goslett, the regional director and chief executive of RE/MAX of Southern Africa, says banks are asking applicants for between 10 and 30 percent of the property’s asking price to qualify for finance.

This can be daunting for any buyer, especially a first-time buyer.

Goslett says the best way to accomplish big goals is by starting small and remaining consistent. “Mountains are climbed by taking one step after another. Even if it is a matter of starting out setting aside small initial amounts, just get started – the sooner, the better.”

He says the best way to set a monthly savings goal is to find the difference between your current rental payment and the estimated bond repayment, which should include other monthly costs such as bond insurance, homeowner’s insurance, rates and levies. If possible, the difference should be set aside as savings.

“The benefits of this strategy are two-fold,” Goslett says. “First, it will build up your savings, and second, it will help you adjust to the cost of owning a property.”

This strategy will reveal to you, as a prospective buyer, whether you are financially ready to own a property and what you can afford. If you are able to meet your savings goal consistently, then you will know you have the budget to buy. If you struggle to meet your monthly savings goals, you might need to adjust your budget and bring it in line with what you can realistically afford.

Goslett says the first place to look for savings is the property you are renting. If your rent is more than 30 percent of your monthly income, it is too much.

“It doesn’t make sense to spend more money on a rental home if it’s holding you back from owning your own property,” Goslett says.

If you’re paying a modest rent, assess your current spending and scrutinise every other expense. You can save by making lunch every day, instead of buying. Or cancel that gym contract and find ways to exercise for free. There are many ways to cut back on spending; it just takes some creativity, Goslett says.