What to look for when moving from tenanat to homeowner
Lower interest rate favours borrowers
Your decision to rent or buy a home is largely driven by your personal circumstances, such as life stage; need for short-term flexibility and disposable income.
However, one external factor that can impact your decision to become a homeowner, regardless of the changes in your personal circumstances, is the prime interest rate.
For many South Africans who rely on credit to facilitate the purchase of large assets, such as cars and property, the prime interest rate is a key consideration. In the context of home loans, this is a key deciding factor because it controls how much money you end up paying monthly and over the life of the loan.
Over the past 18 months, SA has been in a recession, coupled with a pandemic; hence the South African Reserve Bank (SARB) has chosen to drop interest rates to a record low, to help stimulate the economy and reduce the cost of debt owed.
The impact of this external factor is that the repayment of interest on credit such as home loans has declined significantly, making it more affordable to repay monthly instalments.
The positive impact as a tenant is that the historically low interest rate we are experiencing has meant that the gap between your rental amount and what you would pay on a bond has closed significantly.
For example, if you are renting a house valued at R1m for R7,000 a month, you can afford to pay for that house for an average monthly mortgage instalment of R7,200 at an interest rate of 7%. For R200 more you could make the decision to move from renting to buying and putting yourself on the path to owning the home you are currently renting.
It is also important to mention that there are other costs associated with owning a home, such as rates, taxes and maintenance costs and levies if you buy a sectional title property. These extra costs could be as much as R1,500 over and above the monthly instalment of R7,200. However, it does not change the fact that the principal cost of the bond repayment is similar to the rental amount on a R1m house.
The next logical question to be asked is, “will interest rates rise post the Covid-19 pandemic and widen the gap between renting and paying off a bond”? The fair answer to this is, it is still unknown when life will return to normal without any lockdown restrictions.
Secondly, the SA economy is going to take a considerable amount of time to recover, at least two to three years by current estimates. In this period, interest rates will likely remain at current levels to continue to stimulate spending and investment.
To get a more comprehensive understanding of the decision to transition from tenant to homeowner, there are four golden factors tenants should consider:
Make sure the purpose of your purchase is clear and based on a mid- to long-term timeframe, due to the high costs involved in acquiring property. If you tried to sell it in the short term, it would be near impossible to recover the cost incurred with the purchase. These include the transfer cost, transfer duty and registration cost if the property is to be bonded.
Complete a pre-approval to ensure you know the state of your credit health and affordability. If you are looking to banks to provide the loan, they will consider these two factors in their decision to approve your home loan application.
Understand all the costs involved with buying and maintaining the property. As mentioned , your monthly repayment cost is just one you will be faced with. Other costs include monthly rates and taxes; levies; electricity & water bills, and general maintenance, to name a few.
Make sure you are purchasing a property in an area that has good amenities and is well maintained. The value of your property is dependent on the eco-system of schools; hospitals; good road networks; shopping centres and social facilities.
Last year alone, more than 350,000 South Africans took up the opportunity to move from renting to buying, allowing them to take full advantage of the favourable interest rate and hence a borrower’s market. There is merit in joining the homeownership circle, as in the long-term owning your own home is an asset for future wealth creation.