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Your financial checklist before buying a home

Important questions to ask yourself before a major financial commitment.

Whatever your views on residential property as an investment, it is true that most people earning a decent income will aim to buy their own home. For many, this will be the largest financial transaction they will ever make. Before taking such a big step, consider these points to help you decide if you are financially ready.

Have you got a deposit saved?

It is unlikely that the banks will give you a home loan that covers the entire purchase price of the home. They normally ask you to put down a deposit and it is likely to be 20% to 25% of the value of the home. Having the deposit saved will give you some negotiating power with the bank to obtain the best interest rate possible. Your negotiating position should improve as the size of your deposit increases. Saving for your deposit should be the first goal before buying your home.

Can you pay for all the property transaction costs?

In addition to the purchase price of the property, you will also need to pay some transaction costs when buying the home. One cost is a tax called transfer duty and the other cost is for registering your mortgage. This is charged by lawyers and is called a bond registration fee.

The transfer duty on a home would depend on the value. Here are some examples:

R800 000:                 R1 500

R1.5 million:             R30 000              

R5 million:                R387 500

 

Bond registration fees vary but here are some examples:

R800 000:                 R17 348

R1.5 million:             R24 237

R5 million:                 R50 842

In addition to these costs you might need to pay for movers and have money for any maintenance that needs to be done on the property.

Have you got an emergency fund?

Once you have moved in, it is likely that you will not have a lot of extra money left over. This means your first few months in your new home are likely to make you vulnerable to any financial shocks. If your geyser bursts and you need to pay an insurance excess or if you need to replace a damaged car tyre, it is important that you have access to money to cover this cost. This is where your emergency fund comes in. You should have at least three months’ worth of your normal monthly expenses saved in a money market account or as an extra amount in your access bond. Your emergency fund is important as it will prevent you from having to incur expensive debt at a time when you can least afford it.

Is your source of income relatively certain?

It is impossible to be 100% sure of your job security but you should definitely not buy a home if your employer is going through difficult times and there is a prospect of cutbacks in the near future. Similarly, if you work on contract or as a consultant, try to ensure that you are reasonably sure of earning enough income to cover your expenses over the short to medium term. If you lose your job soon after buying your home and are not able to repay your mortgage, the bank could take over your home and sell it to recover their money. If your earning prospects are uncertain, rather build up a bigger deposit and a larger emergency fund that can cover you for 6 to 9 months, which should be sufficient time to get a new job or sell the house.

Don’t forget that you will have additional monthly costs when you buy your home. You will need to pay property taxes or levies, insurance on the property and life assurance to cover the mortgage. At some point, you will also need money to pay for maintenance costs. Even if you live in an apartment, you will need to repaint the inside of your home and possibly fix broken cupboards or appliances in the future. It is important that you have a budget for this.

Do you plan to stay in the property for 8 years or longer?

Many people buy their first home with a clear plan to stay in a small, low cost place until they can afford a larger place. Very often their plan includes moving at least three times: your first home when you are single, three or five years later buying a slightly larger home with your spouse and finally a multiple bedroom home for when you have children. If this sounds like your plan, you should not buy a home. My reasoning is that the transaction costs of buying and selling these properties will set you back financially. Rather continue to rent until such time as you find a home that you will live in for at least 8 years or longer.

Are you buying in the best area you can afford?

The position of your property is possibly the most important consideration when buying a home. You should always try to buy a home in the best neighbourhood you can afford. If you have a choice, rather buy the worst house in the best area not the best house in the worst area. If you buy in a great area, it is likely that your neighbours will maintain their properties, be active in maintaining the area and be willing to spend money on improvements when required. We often see this with initiatives such as private community security and initiatives to maintain suburbs where local government is not functioning.

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Why do they always leave out the other costs??
1. My last move cost R27000
2. Security company – R350-500 /m
3. Property insurance
4. Rates taxes electricity water sewage etc
5. DSTV/Fibre/Phone lines
6. Repainting/ tiling etc
7. Garden and gardening
etc etc

Most importantly, you don’t make money from a property you own while you are living in it.

Some people scrape the barrel to buy in Houghton, Melrose, Bishopscourt etc. but then are sweating to pay the bond and maintenance costs each month.

They look 5 years later and their bond has barely noticeably reduced and they have ploughed 100s of thousands of rand into it already.

Best investment you can make, buy an okay property in a good area that is easily affordable to you. Then buy most properties in good areas and rent them out.

Nothing beats that sort of return in the long term.

What about possibly the most important question of all – Is it better to buy or rent?

Sometimes renting is the better option, but if you don’t investigate properly, you will never know. We recently bought the place we were renting, but only because it made sense for us to do so – yoi can check out our reasoning and the spreadsheet we used for this decision in this blog post – http://www.stealthywealth.co.za/2016/10/is-it-better-to-buy-or-rent-and-why-we.html

Nice article, thanks Warren.

“You will need to pay property taxes or levies, insurance on the property and life assurance to cover the mortgage. “.
You don’t need life assurance (or insurance) to cover the mortgage, neither can you be denied a mortgage if you don’t take the banks’ life assurance (or insurance) option. This is the banks’ salespeople doing the “hard sell”. The bank has the property as security for the loan.

A lot of people “say” they will buy a home as an investment. Then they let the renter pay it off. This means you have no profit for 20 years. Also, when they run out without paying (tenants from hell) YOU will subsidize (if you have the cash) the loan from YOUR paycheque. Then there’s your 20 year plan–66% of marriages end up in divorce. That means you will fight over the house and the lawyers end up selling it to pay THEIR fees. How much of an investment is that? Hillbrow was a swinging place 30 years ago. PLUS these registration fees and lawyers costs are HUGE. In America people refinance for almost NOTHING.

66% of marriages end in divorce? Where do you get that figure? To the point at hand, I believe like other investments decisions there are pros and cons and risks and rewards potential. Property is no different.

the answer is to squat and get everything for free!!!!

End of comments.

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