Don’t rush into home ownership

buy-or-rentMost young people have two main goals when they start working: to buy a car and to buy a home. Both of these are big commitments and if you have not done your homework properly, home ownership in particular could cost you more than you realise.

Ewald Kellerman, Head of Sales at FNB Home Loans, says if you expect to sell your property in less than ten years’ time it may make more sense to rent due to the high transaction costs. “People think that it is better to pay into a mortgage than to pay a landlord, but they don’t realise the real costs of home ownership. If you buy and then sell two or three years later you experience a significant loss,” says Kellerman.

Given the transaction costs as well as the additional amount you would pay initially into a mortgage compared to rental, the breakeven point is around ten years. In other words only once you have lived in your home for at least ten years does it become economically viable.

Transaction costs for a house sold at R800 000

Purchase price: R800 000
Loan amount: R720 000
Bond registration costs: R12 655
Property transfer costs: R20 652
Transaction costs to buy: R33 307

Selling price: R800 000
Agent fees @ 6%: R48 000
Electrical compliance: ±R10 000
Transaction costs to sell: R58 000

For example on a property of R800 000 you would need to resell the property for R90 000 more in order just to break even on the transaction costs alone. (see side bar)

One also needs to take into consideration additional home ownership costs such as rates and levies as well as maintenance costs which are not usually paid by a tenant.

Kellerman says South Africa has a particularly high rate of home ownership while European countries like France and Germany and even the US have far lower statistics as these nations are comfortable with renting. For example in the US only around 65% of people own their home compared to South Africa where that figure is closer to 80%.

But owning your own home is not always about the money – there are emotional reasons as well. There is a sense of ownership, people want to know they own the place where they live and cannot be asked to move. There is also the cost of moving which is not always a choice. A landlord may decide to sell the property and you are forced to move out.

A good financial argument for buying is that a mortgage is also a form of forced saving. While it may make sense to rent and save the difference between that and a mortgage, not many people have the discipline to do that and end up spending the money they should be saving.

While there may be emotional reasons to buy your own home, make sure you understand the financial implications and don’t think that buying is always the best financial decision.

Check your lease before moving

Almost 50 percent of the home loans granted by Standard Bank last year were for first-time buyers who wanted to put their monthly rent payment toward their own asset or home loan. Standard Bank Head of Home Loans, Steven Barker, warns that there are certain costs you need to take into account when making the transition from renting to becoming a homeowner.

The buyer’s checklist

Praven Subbramoney, Head of Collections at FNB Home Loans provides questions all prospective buyers need to ask, especially if you’re buying a repossessed property:

  • Is there is a non-refundable deposit payable and what is the percentage thereof?
  • Is the seller VAT registered ? If so who is liable for VAT?
  • How much time is allowed for guarantees to be provided?
  • Ensure that you know what the condition of the property is, especially if you are buying a repossessed property.
  • Can alterations be done prior to transfer?
  • Is occupational rent payable, and if so, from when and how much?
  • Are there any prohibitions regarding the sale and successful transfer of the property?
  • What happens in case of breach of the agreement?
  • Who is liable to obtain compliance certificates and payment thereof?
  • Who is liable for payment of arrear rates and taxes / also pro-rata from acceptance until date of transfer?
  • Are there any special conditions you should be aware of?
  • Is the property vacant and who would be responsible for an eviction of the occupant, if necessary?

You may need to exit your lease or rental agreement early in order to meet the occupation date for your new home. “A renter is liable for the rent for the months left in the lease, which means you run the risk of having to pay a bond and the rest of your lease payments at the same time.” You may able to sub-let the rental property, but this can be done only with your landlord’s consent.

You will need to create a municipal rates, water and electricity account for your new home while still paying for the electricity and water in your last month of rental. You may also need to pay a deposit on your electricity account, if it is not on a prepaid system. If you have your own water and lights account where you rent, you can arrange to have that deposit transferred to your new property, reducing your set up-costs with the municipality.

If you use a landline telephone, you can incur costs for transferring your landline or for installing a new landline connection. Find out if the previous owner has a landline and even a modem or internet router that can be transferred to your name so that you save on installation costs.

Calculate your moving costs. Depending on how much furniture you own and the distance between the two properties, you may need to use a moving company. It is usually cheaper to book your furniture removal on a weekday in the middle of the month, rather than on a weekend at month end.

Ensure that you make a snag list of things that are wrong in the rental property so that you know what amount may be deducted from your rental deposit for repairs.

You should also draw up a snag list for your new home to ensure that you don’t have to repair damage done before you bought the house. Ideally, you should include any required repairs in your purchase contract, for the cost of the previous owner.

“It’s important to plan for these expenses before committing yourself to buying a home,” Barker says. “The last thing you want is to fall short on your first bond payment because you’ve been taken by surprise by the practicalities of your lifestyle change.”

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