Ready to buy a new house?

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. 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 they also want to know how to find out what mortgage they can afford and the related costs of buying a home, such as 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 the 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 R7 800.

They would need to have a combined after-tax income of about 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 and 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 about three 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.

When to buy

Jana and Bertie raise an interesting question about whether to buy a flat now or 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 to buy their dream home, they may find they have lost money due to transaction fees.

For example, on an R800 000 flat, the couple would spend about 4% of the purchase price on transfer and bond registration costs.

When they want to sell, they would pay about 5% to an agent. Therefore, the property value would have to increase by 9% just to break even.

If it is cheaper to rent, it may make sense for the couple to rent for a few years, and build up a healthy deposit and money for the transaction fees.

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 homeowner’s budget.

This strategy does require discipline and motivation as many young people end up spending rather than saving.

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.

Loos 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 this year will remain a buyer’s market and property prices are not expected to rise significantly.