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How much home can you afford?

Buying a home ought to be an exciting, enriching experience – but it can turn into a very frustrating and embarrassing one if you spend weeks finding the “perfect” home only to discover that you can’t afford it.
 
It’s always better to know your price range before you start looking for a home, says Richard Gray, CEO of the Harcourts Real Estate group, and for most people this will be determined by three factors, which are:

- The size of the home loan for which you can qualify;
- The amount of cash you have available for a deposit and transaction costs such as transfer duty, bond registration and legal fees; and
- The price you actually think is reasonable and realistic in terms of your own housing requirements and other financial goals.
 
“Although some buyers can pay cash for a property,”he says, “by far the majority need to obtain a bond from a bank to finance their home purchase - and they may not be able to borrow as much as they think.
 
“The banks determine how much they are willing to lend to a particular borrower after examining his or her credit record, employment history and current financial situation. Under the strict rules of the National Credit Act, they have to ensure that the borrower could comfortably afford the new loan repayments in addition to any existing financial commitments and living expenses, and would not become over-indebted even if interest rates were to rise.
 
“Consequently, even people with high incomes might not be able to obtain as big a mortgage as they might expect, if they already have many other debts that are eating into their disposable income each month. And that would be a pointer to focus their attention on less expensive properties than they might initially have targeted.”
 
Prospective buyers, Gray says, can quickly get a sense of what size home loan they might be able to obtain by using the calculator on mortgage originator ooba’s website (www.ooba.co.za). They can also go through an easy pre-qualification process with an originator before they start house hunting.

Ooba, for example, has a network of pre-qualification experts located around the country, who will liaise with prospective buyers, request the relevant paperwork, and within 24 hours provide them with a free pre-qualified loan certificate and credit report. “Having the certificate can give them an edge in price negotiations because it gives the seller confidence that they are making a genuine offer and that there is a high likelihood of the bank approving their home loan application.”

Meanwhile, he says, those who don’t have many debts and have saved up cash for a deposit and transaction costs might actually be able to afford a higher-priced property than they originally thought, because the size of the home loan they require will be reduced by the amount of the deposit.
 
“However,” he cautions, “they might do better to still opt for the type of property they initially had in mind, take a smaller loan and keep their monthly home loan repayments as low as possible. Smaller bond repayments certainly give borrowers more leeway when interest rates increase, and often also give them the ability to pay their home off more quickly. Smaller homes also cost less to run and maintain.
 
“In addition, everyone has their own ‘comfort level’ as far as debt is concerned, and prospective buyers should think about this ahead of time so that their home purchase does not become a burden instead of the pleasure it should be.”


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