The time has come to buy your first home. You’ve scraped together some money for a deposit, you’ve browsed through property listings and maybe even viewed a house or two. But, before you fall in love with a home, you must be 100% sure about what you can afford.
Too many people make the mistake of buying a home they can’t afford by rationalising a pricey property as an investment. This could seriously impact your financial life for many years by preventing you from putting money in other areas. Your emergency fund, retirement fund or even that education fund you’re putting together for your children could all be compromised. Are you willing to sacrifice your future or that of your children in order to live in a big house now?
You’re likely either feeling excited, terrified or a combination of the two. And you realise that every time you’ve ever bought anything, it’s very likely that you’ve gone over budget. But when you’re buying a house, spending just a little bit more can set you back many thousands of rand.
Here are some tips for staying in budget when buying your first home.
Know how much you can really afford
You might think you know how much you can afford but it helps to do the maths to make sure about your numbers. Now’s the time to whip out your paper and pencil or Excel spreadsheet and make those calculations. There’s a rule when buying property which you may or may not have heard of. The 28/36 rule. Now, like all personal finance rules, it shouldn’t be followed to the letter. It’s okay to personalise it to your own situation, of course. This formula comprises two parts to help you really understand how much you can afford to spend.
First of all, your total housing costs shouldn’t total more that 28% of your gross monthly income. That’s the income you receive before taxes and other expenses are subtracted. It’s important to remember at this point that your total monthly housing costs include more than just your home loan repayments. It also includes all the additional costs like insurance, taxes, water, electricity and home association fees.
If maths wasn’t your best subject at school, simply add up all of your income, including that of your partner’s if applicable, and multiply by 0.28. That should give you a rough idea of what you can afford to spend on housing. Of course, just because your calculator says you can spend a certain amount doesn’t mean you should. If you can find a home for cheaper, do that. You could always invest more for your retirement or in your emergency fund.
The next step is to think about your total debt. According to this formula, your total debt repayments should not be more than 36% of your income. Add up your home loan, credit card payments, car payments and other debts. All of those should not equal more than 36% of your income. This means that the higher your debt, the less you should spend on buying a home. If your debt is low or even non-existent, you can aim for that 28% figure. Remember, it’s better to aim a little lower.
Know your cost price
Once you have an idea of what you can afford to spend, you’re going to need to send all your details to a bank or bond originator to find out what they think you can afford. Keep in mind that just because they say you can spend a certain amount, doesn’t mean you should. You need to keep your entire life and financial situation in mind and only budget for what you truly can afford.
Realise your cost price isn’t the total amount you’re going to spend
We’ve already mentioned additional costs. It’s important that you realise what those are before buying property. For example, if you’re buying a home for R1 million, it could cost about R20 000 to have the bond registered. In addition, it could cost about R30 000 to pay for the home to be transferred into your name. Then there are all those other costs which you might not have thought of. Moving, registering utilities, additional security, monthly rates, taxes, levies and whatever renovation or additions which needs to be completed. It’s important before you start making changes to the house that you understand your rights and responsibilities of being a homeowner. That’s why it might be beneficial that you read law guides around buying and selling a house. These all cost money. A good guideline to follow is to decide how much you can afford to spend. Set aside 30% for all of these extras and use the other 70% for actually buying the house.
Once you’ve decided what you can afford to spend each month on housing, you can calculate what property price is within your means. Only now are you ready to start looking for your dream home.