Before buying a home, you need to first do your homework, test your financial robustness, and fully understand the cost implications of home ownership. If you run into financial difficulty it is not as simple as giving notice to your landlord – if you default on your mortgage repayments, you stand to lose your home.
The decision to switch from renting to buying has been made more attractive by the current low interest rates. For many, a mortgage repayment may now be in line with what they are paying in rent. This creates the opportunity to move into the property market. For example, on a mortgage rate of 8% (one above prime) your repayment for a 20-year mortgage would be around R8400. The mistake one could make is thinking that if you are able to afford rental of R8400, then you can afford to buy a home.
What will it cost to run the home?
There are more costs to home ownership than there are for someone renting. You will have to pay rates and taxes, utility connection fees, levies and maintenance. These could add up to 30% of your mortgage costs. If your mortgage is R8400 a month, you will need to budget for at least an additional R2500 extra for running costs.
If you are looking at properties, make sure the estate agent provides you a statement to show you all the monthly costs. Ask for the rates, utility and levies bills. If the property is on a pre-paid meter, ask to see the amount the current homeowner is paying each month. It may be worth spending the money on a home inspection before you buy so you know if there are any defects that either the homeowner needs to rectify or that you need to budget for in terms of maintenance. A home inspection costs around R4500.
In Bontle’s case, she could see that the pool was not in working order and requested that this be rectified as part of the offer to purchase. She also asked for the rates bills and the estimated amount the sellers spent on electricity. While the electricity bill for the retired couple was only R1000 a month, she was warned that once the pool pump was operational, it could add a few hundred rand to the electricity bill. With just the rates, water and electricity bills Bontle needed to add R2400 to her homeowner budget.
What will it cost to buy?
When you come to buy a property there are many upfront costs you need to consider. Most banks will require a deposit of up to 10% of the purchase price. Then there are transfer costs paid to the conveyancing attorney, transfer duty (tax) on a property valued more than R1 million as well as bond registration costs.
As our first-time homeowner Bontle had the goal of finding a home for her and her daughter, she made the decision to move in with her parents. While helping them with the day-to-day expenses, she was still saving a lot of money by not having to pay rent. This gave her the opportunity to save up for the deposit and bond registration costs. However, she was still surprised to discover that there is another set of attorney fees to cover the cost of transfer. As she had not prepared for these, she had to put these on her credit card. This added a financial cost she had not prepared for.
Ideally you want to save up enough money to cover all these expenses upfront and not have to take on more debt. While Bontle was able to save on her rent, not everyone is in the same position. If you are currently renting, calculate how much more it would cost you to be a homeowner – the difference between your current rental and potential mortgage as well as running costs.
The best way to understand your mortgage costs is to apply for a pre-approved mortgage. Ask your bank what mortgage they would approve, at what rate and the monthly repayment. Bontle had a pre-approved mortgage which made her offer more enticing. A seller is more likely to agree to an offer if they know the bond is likely to be approved.
Once you understand how much more homeownership will cost, put this money away each month towards your home ownership ‘war chest’. This is not only to provide you with the money to pay the fees, but you will also have a better understanding of whether or not you can afford to be a homeowner. If you are struggling to put those extra funds away, then you may need to revise your affordability.
By Maya Fisher-French
*This is part 2 of a 6-part series in partnership with City Press, which takes a first-time home buyer through the process from beginning to end.
