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Buy a home or replace my car?

May 16, 2023

Buy a home or replace my car?Many people are wondering whether now is the right time to buy a home for the first time, given the high interest rates. It is a common question I receive from readers.

One reader wrote: “I am looking to buy a home for the first time but am concerned about the high interest rates. I have a similar situation regarding a car as well. My current vehicle has high mileage and requires changing but obviously I can’t buy a house and a car at the same time as banks look unfavourably at anyone applying for a bond while having car debt. How should I approach this?

The good news is that interest rates are probably at a peak and are not expected to increase significantly from here. So, you should not expect an interest rate shock going forward. However, you need to make sure you do your affordability calculations correctly.

Buying a home is a big commitment and you need to ensure your finances can manage with the additional costs. Ideally you should have a 10% deposit plus a further 8% to cover all the transaction costs associated with purchasing a home. That means you should aim to have saved 15% – 20% of the purchase price.

Make sure you also factor in the running costs of having a home. There are rates, utilities, maintenance, and insurance to pay for over and above the mortgage payments.

If your car needs replacing in the short term, this could add considerable financial pressure to a new homeowner.

One strategy could be to replace your car first, but to keep to a very affordable model. Remember, the amount you spend on the car will have a material impact on your affordability to buy a home. A home is a far better investment than a car, which depreciates the moment you first drive it.

If possible, try to pay the car off over 36 months. This means in three years’ time you will have paid off the car and the money you were using for the car repayment would be available as funds to put towards your new home. It will also show the bank that you have financial discipline which could improve the rate that you qualify for.

The bottom line is that you need to have a plan in place. Do not rush into any debt commitments until you have analysed the numbers and how the debt would impact your monthly living costs.

This article first appeared in City Press.


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Maya Fisher-French author of Money Questions Answered


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