First time buyers need to be of essential details that should not be overlooked during the purchasing process; this is difficult as excitement and the associated freedom can override the logical thought process. Home ownership is essentially a commitment, a marriage between yourself and the property you are interested in and should not be taken lightly.
When evaluating your affordability of the property is – assuming you do not have a car payment now – will you be able to afford a car payment at a future date when you purchase this property? First time buyers should gather relevant to ensure an informed decision is made, as well as being fully aware of your future long term plans.
Some points to consider:
1. It is not just a matter of being able to afford a monthly repayment, you also need to assess whether this repayment is a high percentage of your income (I recommend that a bond should never exceed more than 25% of your income, this buffers in a safety mechanism should interest rates rise). You also need to place the less visible costs into your estimation of affordability, such as insurance, maintenance, and improvements.
2. Even if you can afford the monthly repayment, have you considered that the costs of purchasing a property can be as high as R50 000 on a R1 000 000 purchase? You also need to consider whether it is a buyer or sellers’ market? (Are the interest rates rising, is the economy growing or shrinking etc.). It may not be such a bad idea to hold back on purchasing until you have saved up a nice big deposit, of at least 20% in my view.
3. The adage “buy the worst house in the best area” is something to consider. Property location is an extremely important factor when buying, it does not matter how much money you throw at a property in a poor area to improve it, and it is likely you will still not make as much money as you should if you decide to sell your property later. Always speak to your estate agent about the amenities in the area (schools, hospitals, shopping centres and lifestyle experiences).
4. When you buy a property, chances are very good that you will need a loan from the bank. The golden rule here is that you should always consider an access bond. It is in your best interest to place extra funds into the bond, but you may need access to these additional funds in event of an emergancy or should a lucrative deal come your way.
5. Do not be scared to ask for a price below the advertised selling price; you will often find that sellers inflate their price so that they end up negotiating to a price that they were comfortable with. Also be aware of factors that affect your offering price, such as rising interest rates, low GDP growth rates, over-supply of new cheap developments and the urgency of the seller to secure the sale.
6. Use resources available to you. Your bank will generally have all the information available on the property you are interested in as well as the area it is situated in, this can be a departure point as to the price you are willing to offer. There are also third party providers who can provide this service for a fee.
7. Consider your “why” when wanting a property, as the purchase of this particular property you are looking at may not be ideal. It is not smart to constantly “upgrade” your lifestyle and change properties simply to acquire an additional room or a poo; the transaction costs add up very quickly. You should also consider what shall be done with the property when you out-grow it; can this property be used as an investment property? Your financial advisor would be able to evaluate the asset in this light.
All in all, a property purchase is one of the biggest purchases of your life and getting this wrong may be the difference between your dream retirement or retiring in a sub-standard lifestyle. Property costs you a lot more than you think (especially in a high interest rate environment). It is easy to buy and hard to sell, so think carefully about which property you will decide to “marry”.
Robert Starkey RFP, MIFM