When it comes to buying a home, misinformation can lead to costly mistakes and unnecessary stress. Let’s debunk some common myths to help you make informed decisions on your home buying journey.
Myth 1: I Need a large deposit
While having a deposit to offset the enormous cost of buying property is advisable, a large deposit isn't always necessary. It is still better to have some deposit than none at all and most first-time buyers put down around 10% of the purchase price. However, many banks are open to offering 100% home loans. If you opt for a 100% home loan, remember that your bond repayments will be higher, and you’ll need to adjust your monthly budget to maintain financial comfort while making repayments.
To ensure an even better financial footing before buying a home, we advise you to do the following:
1. Managing Debt and Income Ratio
One of the primary considerations for lenders is ensuring that borrowers do not become over-indebted. If your existing debt and monthly obligations consume a significant portion of your after-tax income, it signals to lenders that you might struggle with home loan repayments. Prospective borrowers must carefully assess their financial situation and aim for a healthy balance between income and debt.
If you don’t have a budget or you are not good at keeping yours up-to-date, now is the time to get a better understanding of your spending.
Start by determining all your income sources and totaling these amounts into one number. Once you have this number, use your bank statements and credit card statements to determine how much you spend on fixed payments (such as car payments, school fees, medical aid, etc) and optional spending (everything that you don’t pay a fixed amount on every month) List all the fixed expenses, and the average you've spent on them for the past three months. Categorize each optional item in groups such as food, transport or petrol, entertainment, clothes, baby supplies, household, travel, transportation, etc. List each group on your spreadsheet, with the average you've spent on each over the past three months.
2. Maintaining a Strong Repayment Track Record
While having no defaults on loans is crucial, a habit of paying bills late can adversely impact your credit record. Lenders scrutinize your payment history, including credit cards, store cards, car repayments, rent, and other financial commitments. To enhance your chances of approval, a track record of timely payments for at least two years is recommended.
When times are though, building a credit score might feel impossible - but it is doable. Find out how you can build your credit score when you are broke
3. Stable Employment History
Lenders prefer borrowers with a stable employment history, ideally spanning two to three years. This stability assures the ability to meet long-term financial commitments. Self-employed individuals may face additional scrutiny, necessitating meticulous record-keeping of income and expenses.
Myth 2: You don’t have to get prequalified
Prequalification is a crucial step in the home buying process. It provides a clearer picture of what you can afford and shows sellers that you are a serious buyer, increasing your chances of closing on your desired property.
While prequalification might seem like an unnecessary item of admin that you simply do not have the time for, buyers are regularly surprised by what they thought they could afford and what the banks would grant them when they finally reached that point in the process.
"But we used an affordability calculator!" While they do a fantastic job of giving you a rough estimate of what you could afford, there is no guarantee that you will be able to qualify for that loan amount. For that kind of assurance, financial institutions would first need to run several credit and background checks before they could grant you an amount.
Financial institutions, therefore, provide a pre-approval facility that allows consumers the opportunity to discover what they can truly afford. Buyers can either apply at banks directly or use a bond originator that will guide them through the process.
What do I need for prequalification?
To apply for prequalification you will need the following:
- A copy of your ID
- Your latest payslip
- Three months worth of bank statements
Once issued, the pre-qualification will state the bond amount, interest rate, and instalment amount for which you qualify. However, buyers should be cautioned that these amounts are only 100% finalised after the bank has completed a property valuation and has received a signed Offer to Purchase on the property in question.
Not only will having a pre-approval certificate provide you with the assurance you need to begin your property hunt without any fear, but it also lets sellers know that you are a serious buyer. This often makes them more willing to work around your schedule when coming for viewings. But, by far the most important advantage is that, should it come to the point where more than one buyer has put in an offer, the pre-approval will boost the chances of your offer being the one that is accepted.
Get prequalified and apply for a home loan here.
Myth 3: Renting is cheaper than buying
When deciding between buying and renting a home in South Africa, many people assume that renting is the more affordable option. However, buying a home can often be cheaper in the long run. Here’s how:
1. Building equity
When you buy a home, your monthly payments contribute to building equity. Instead of paying a landlord, your money goes towards owning your property. Over time, as you pay off your mortgage, the equity in your home increases, which can be a significant financial advantage.
2. Stable monthly payments
Rent can increase annually due to inflation or changes in the rental market, making it less predictable. On the other hand, with a fixed-rate mortgage, your monthly bond repayments remain consistent, allowing for better long-term financial planning.
3. Appreciation of property value
Real estate typically appreciates over time. When you buy a home, its value will likely increase, providing you with a profitable investment. Renting does not offer this advantage, as any appreciation benefits the landlord, not the tenant.
4. Potential rental income
If you buy a property with extra space, you can rent out a portion of it to generate additional income. This option can significantly offset your mortgage payments, making homeownership even more affordable.
Using a bond calculator to compare costs
A bond calculator can help you compare the costs of buying versus renting. By inputting your potential home loan amount, interest rate, and repayment term, you can see your estimated monthly bond repayments. Comparing this figure to local rental prices can provide a clearer picture of which option is more affordable.
Myth 4: Google can tell me everything I need to know
While online research and property portals provide valuable information, they cannot replace the expertise of a knowledgeable local real estate agent. Home buying involves significant financial decisions, and a local agent can offer personalized advice and support throughout the process, from prequalification to closing the deal.
Understanding the realities behind these common myths can empower you to make better decisions when buying a home. Whether it's securing a manageable loan, prequalifying for clarity, choosing to buy over rent, or seeking professional advice, being informed is your best asset.
