Buying a home is a financial plan not an emotional impulse. You need to have a strategy in place before taking on the commitment of homeownership

Jana and her husband Bertie want to take the big step and buy their first home. This is a serious commitment for any couple and they want to do their homework properly.

“We want to start a family soon so should we buy our big three-bedroom house or should we start with a flat for the first few years?” asks Jana who adds that the couple also want to know how to find out what mortgage they could afford as well as the costs of buying a home including transfer fees and bond registration.

When buying a home the starting point is always affordability: make sure you only buy a home that you can afford to repay and that you have saved not only enough money for the deposit but also to cover transfer costs. If you cannot find money in your budget to save for these, then you probably cannot afford a home.

Affordability

Most banks and mortgage originators have online calculators that can give you an idea of what mortgage they would grant based on your income. The houses and flats in the area where Jana and Bertie live range from R800 000 to R1.2 million. Using mortgage origination company ooba’s online calculator (www.ooba.co.za) if the couple bought a property for R1 million and had a 10% deposit (R100 000) they would have bond repayments of R7800. They would need to have a combined after tax income of around R26 000 a month.

The couple must not only rely on the bank’s affordability measure as this is just a guideline. It is very important that they do their own budget to see what they could reasonably afford including rates and taxes, water, electricity, insurance and maintenance.

Ideally Jana and Bertie should aim to pay an additional 10% into their mortgage each month in order to give them flexibility should interest rates rise. This would also reduce their mortgage repayment period by around 3 years. Realistically however it is easier to commit to this increase in your second year as there are many costs to incur when you first move. Jana and Bertie should make a commitment that within a year or two they increase their mortgage repayments as their salary increases – as long as they are meeting other financial goals such as emergency savings and retirement savings.

The couple will also need to have saved for a 10% deposit as well as transfer and bond registration costs (see Home Buying Tips )

When to buy

Jana and Bertie raise an interesting question about whether to buy a flat now or to wait a few years to buy a bigger home once they start a family. If the couple know they will be selling the flat in less than five years they should carefully consider the costs of buying and selling such as transfer fees and estate agent fees.

If the couple’s plan is to sell the flat within five years in order to buy their dream home, they may find that they have lost money due to transaction fees. For example on a R800 000 flat, the couple would spend around 4% of the purchase price on transfer and bond registration costs. When they came to sell they would pay around 5% to an estate agent. Therefore the property value would have to increase by 9% just to break even.

If it is cheaper to rent (which it usually is), it may make sense for the couple to rent for a few years, build up a healthy deposit and money for the transaction fees and buy their dream home when they are ready. By saving the difference between their rent and a future mortgage they would build up a healthy deposit and get used to living on a homeowners budget.

This strategy does require discipline and motivation as many young people end up sending rather than saving the money. John Loos, FNB property economist makes a good point when he argues that people who rent to “save” money on mortgage repayments often blow it on lifestyle rather than saving and investing. He argues it is better to buy a home and build up an asset.

If you are saving up for a deposit, don’t be too worried about the property market running away from you; economists believe that 2013 will remain a buyers’ market and property prices are not expected to rise significantly.

HOME BUYING TIPS

Understand your total cost

When buying a home you need to have a 10% deposit as well as funds to cover transfer fees and bond registration. Mortgage origination company ooba (www.ooba.co.za) has a great online tool that shows you the transaction costs you would incur. For example their transfer and bond costs calculator show that for a R1 million property one would incur R45 000 in fees in addition to the R100 000 (10%) deposit. So one would have to have R145 000 in cash to buy the property.

Buying on auction

If you buy a property on auction you would need to have a pre-mortgage approval for the amount you want to spend. In the case of a repossessed property, only buy the property if the owners have moved out. There are horror stories of owners who refuse to move out or they strip the property bear. The FNB Quick Sell site  has distressed properties (not repossessed) for sale where you may pick up a bargain and the bank waives certain fees.

Buying a rental property

If you are buying a property that has an existing tenant, check the lease as a tenant lease super cedes that of property ownership – so if there is a lease in place they do not have to move out even if the owner sells.

Check the valuation

Your bank would first do an evaluation of the property before granting the mortgage so it is worth finding out from your bank what you could expect to spend on a property in the area so that you do not end up making an offer and the bank rejects it on valuation.

Inspect the property

Definitely consider a home inspection before you buy. Home inspections are common overseas but have only recently become popular in South Africa. A home inspection company will check for serious structural problems such as the roof and foundations.

Investigate the body corporates              

If you buy a flat or townhouse with sectional title make sure you do your homework on the body corporate first. Ask to see their financials to make sure they are solvent. There are many sectional title developments that have gone bankrupt. Ideally you should join the body corporate so that you know what is happening with your levies.

This article by Maya Fisher-French first appeared in City Press.