Go smaller and you are more likely to keep your home in tougher times

MUCH has been said about the “hidden” costs of buying a home, such as transfer duty, legal costs and bond registration fees, but in these tough times, homebuyers also need to look ahead and budget for the additional costs they may face once they become homeowners.

Shaun Rademeyer, chief executive of mortgage originator BetterLife Home Loans, says: “Buyers need to know, for example, what the implications are of buying a property with a large garden rather than one on a smaller stand that will attract lower municipal rates and taxes – and may also save them time and money when it comes to upkeep.”

Other budget items to consider are homeowner’s insurance (HOC) premiums, levies in sectional- title complexes, water and electricity charges, cleaning costs and time and the cost of security measures such as fencing and burglar bars.

“And if you have a smaller home, the chances are that all of these costs will be lower than if you have a large property. The levies in sectionaltitle schemes, for example, are usually calculated according to the participation quota or PQ for each unit – so the larger the unit, the bigger your share of the overall levy bill will be.

“As for HOC premiums, these are calculated according to the current replacement value of a property, and will go up as that value increases. They are also not optional for anyone who has a bond.”

Similarly, says Rademeyer, it costs more to secure, clean and maintain a large property, and to provide water and electricity for a large household. And with utility costs continuing to rise steeply, many homeowners with bigger homes keep having to rethink their budgets and try to cut down on other items such as entertainment, transport and cellphone costs.

“Indeed, when you add all these homeownership costs up, you can easily understand the current trend towards downscaling from large homes to smaller ones, and the growing preference among first-time buyers for apartments and town houses.”

What is more, he says, in the current economic climate homebuyers now also need to consider what their position would be if home values were to decline again as they did in 2008/09, and make their decisions accordingly.

“As FNB analyst John Loos noted recently, one of the biggest misconceptions about residential property is that house prices always go up. Even though in SA property prices have only declined three times in the past 48 years, it is a possibility and homebuyers need to ensure that, if they have to resell in a hurry, they won’t owe more on their bond than the property is worth.

“In other words they need to think very carefully before committing to a no- deposit home loan and then possibly taking on even more debt to finance the transaction costs.”

Rademeyer says that in most cases, it is better for homebuyers to save up a sizeable deposit and then to buy a less expensive home than they had perhaps first envisioned.

“This makes it easier to qualify for a home loan at a favourable rate, and gives them the financial leeway to pay their bond off faster if they wish or to cope with any future interest rate increases.

“And that in turn means they are less likely to face the kind of financial pressure that might force them to sell when times are tough and it is really not advantageous to do so,” says Rademeyer.