A 23-year-old wants to do the right thing with her money and not end up a casualty of ‘bad debt’.

Nthabiseng has just graduated and started her first job. She still lives at home and is currently using her parents’ car. “I am caught in between buying a comfortable car or an apartment,” says Nthabiseng who is also concerned about whether or not she would qualify for a home loan. She has identified an apartment she would be interested in buying for R600 000 with upfront costs of around R45 000. “What should I be doing now? I just don’t want to end up in bad debt,” asks Nthabiseng.

Listen to Maya and Mapalo Makhu discussing this and other topics in the My Money My Lifestyle podcast.

Here are some of the points to consider if you are in a similar position to Nthabiseng.

Does it make sense to buy an apartment with cash?

You could buy an apartment with cash, but it will take time to save such a large amount. Taking out a home loan is not a bad decision as a house is considered “good debt”. The interest rates are relatively low, and property is an asset that grows in value over time. You can even earn money if you rent it out.

You could aim to build up a good deposit of around 20% (this would be R120 000 on a R600 000 property). This would lower your monthly repayments and possibly help you qualify for a better interest rate.

Car loan or home loan?

A car is a depreciating asset – that means it is worth less every single year. So, paying interest on a car is not the first choice. You should rather aim to buy the car with cash if you are not in a desperate need for a car. You could save money by buying second hand, as a new car depreciates on average by 25% in the first year.

Do I qualify for a home loan?

Even if your salary means you would qualify for the R6 000 bond repayment on a R600 000 apartment, the bank would probably want to see you working for a year or two before buying a property.

While they may give you a mortgage now, it would probably be at a higher interest rate as you have only just started to work and haven’t built up a track record in terms of banking behaviour.

A better option would be to work out how much the property would cost each month and to start putting away that amount towards a deposit. The bank will see from that behaviour that you can afford the property and have the discipline to make those payments each month.

Currently on a R600 000 mortgage you would pay around R6 000 a month in repayments, but you need to factor in rates, levies, water, electricity and also maintenance. It would be safe to say that you would spend around R10 000 a month as a home owner.

If you saved that each month for the next year, you would have a R120 000 deposit, which would drop the monthly repayment to R5 000 per month. Alternatively, you could continue to pay the R6 000 and pay off the property sooner.

Consolidate before moving out of home

Recent graduates have a fantastic opportunity to make the most of their salary by living at home, if this is an option. You shouldn’t rush to get financially committed to debt and bills. Once you own a car and a home, your salary doesn’t go quite as far. Currently based on her salary and minimal living expenses Nthabiseng could save R13 000 a month into a money market account. If she makes this a two-year project, at the age of 25 she will have enough money to buy a car cash and put down a deposit on an apartment.

Why do you pay a R500 000 car off over 72 months but a R500 000 home loan over 20 years?

It is very important to understand the difference in the quality of debt and how home loans work.

A car is a depreciating asset, so it devalues each year. In fact, depending on the length of the financing period, your car is worth less than you owe on it for the first few years. So, banks limit the lending period to 72 months as the car is the security for the loan. If you finance the car over a longer period you are in a situation where your car is never able to be sold to settle the loan amount. That is a risk to the bank – and to you as a borrower.

Property is an appreciating asset: it generally increases in value over time. Therefore, banks are prepared to offer longer lending periods as over time the property will be worth more than the amount of the home loan. Given that the average house price in South Africa is R1 million, most people require 20 years to pay it back. This is the default time period, but you can change it.

There is no reason why you cannot take out a shorter home loan. According to Nondumiso Ncapai, Head of Home Loans at Absa, the bank will issue a five-year home loan with a minimum value of R20 000.

Even if you have taken out a home loan over 20 years, you can pay it off as quickly as you like. You only need to give notice three months before final settlement of the amount.

In this example of a R500 000 home loan, if you paid the property off over 20 years you would pay R4 908 per month and a total of R1.2 million. You could increase your repayments to R10 600 and pay it off over five years, paying only R636 000. You have the choice.

As a final point, if you are buying property for R500 000 and a car for R500 000 then your financial priorities are mixed up. A car will not build you wealth – rather invest in a property with better growth or income potential or focus on being debt-free.

This article first appeared in City Press.