There’s a lot of information a first time home buyer is unaware of. Here’s our ultimate financial checklist to make sure you’re ready to buy.
Buying your first house is like the unofficial rite of passage into adulthood. It signifies security, permanence, and the beginning of the legacy you’ll leave to your children. Or your pets. For many, it’s the accomplishment to write home about, with a “P.S.: You can stop worrying now, mom”. And yet, the first time home buyer group seems to be on a decline in South Africa.
The Slow Decline Of The First Time Home Buyer
Many experts will tell you, that the reason there are less first time home buyers emerging is because: millennials. Millennials (those born roughly between 1980 and 2000) are coming of age… home buying age. But, according to an FNB analysis, it’s the percentage of interprovincial repeat buyers (the older, more established professionals) that are on the rise. Repeat home buyers more than doubled, from 6.4% of buyers during the 2008 / 09 recession to 12.9% in 2016.First time home buyers, on the other hand, made up a measly 10% of total home buyers in the City of Cape Town. All the other major metro regions have higher percentages, by comparison (28% in the greater Johannesburg Metro region).But, consider that the average estimated house price in the Western Cape is R1.411 million, compared to an average price of R1.042 million in Gauteng. It becomes apparent that we cannot discount the role of affordability – not in this economy, anyway. Which is why it is unsurprising that the top performing sector in the Western Cape (historically the strongest housing market), is the lower price band. Homes under R1 million have an average house price inflation of 11.87%.On top of that, CEO of RE/MAX of Southern Africa, Adrian Goslett, said a few months back that only about 65% of first time home buyer bond applications are approved. Which he explained highlighted the importance of being financially prepared before applying. Hence…
The First Time Home Buyer’s Financial Checklist
Your Credit Score
If you honour the little payments, you’ll honour the big ones. That’s what the banks figure. Many a first bond application has been turned down due to missed or slow payments in the last six months to a year. Yes, you may dispute these, but why go to all that trouble? Get your free annual credit reports and review these for any discrepancies. As of last week, TransUnion has made it even easier for consumers to get a snapshot of their credit status, by launching their SMS service.If your credit history has shaped up, but not your credit score, consider boosting your credit score. One example would be to not pay only the minimum amount owing on any of your credit accounts.
Your Annual Income
The maximum bond amount you’ll qualify for is based on your annual income. Be sure to include any performance bonuses, investment returns, and freelance income in your disclosure. Don’t be modest here, this isn’t a tax return. You may, however, consult your annual tax return documentation to determine an accurate figure.
Your Disposable Income
Don’t get too excited yet. The banks don’t only look at how much you earn. They also investigate how much of those earnings is actually available to honour bond repayments – with added leeway should the interest rate go up. It doesn’t matter how much you earn, if your disposable income is being haemorrhaged through prior debt commitments, you will not likely be approved.The banks, or any lender for that matter, will work out a debt-to-income ratio to determine your level of affordability. According to Goslett, a lower debt-to-income ratio will increase the chance of gaining approval for a higher bond amount. He advises increasing your disposable income by getting rid of or paying down debt as much as possible.Banks want the assurance that you can comfortably afford to maintain your bond repayments (including the interest, taxes, and insurance – including bond cover). Lenders generally approve an amount where these costs would not make up more than around 30% of your income before taxes.
Do you have more assets than liabilities? Any vehicles, investments, etc., that you own, will add to your net worth. This is another aspect of your financial profile the bank will consider when calculating the bond amount they’re willing to approve.
While a deposit isn’t always required for repeat buyers, bond originator, BetterLife, says the first time home buyer will be required to put up an average cash deposit of 12.3% of the purchase price of the property. That's besides the transfer fees, attorney fees, and bond costs – all costs associated with a home purchase.
Former finance minister, Pravin Gordhan, made more than a few fans in February when he announced that the threshold for the payment of transfer duty on house purchases has been increased from R750 000 to R900 000. Previously, you would have had to pay 3% of the value of the purchase above R750 000 to SARS. But, now the tax break has been extended.For homes above R900 000, however, transfer costs are charged at a tiered rate starting at 3% and increasing incrementally up to 13% of the value of a home above R10 000 000.