Home Loans – money saving tips for first-time buyers
October 18, 2017
What are some useful home loan tips?
- Financial planning is critical
- Buy a property that is affordable
- Save a good chunk of cash before attempting to purchase
- Opt for the shortest bond period possible
- Pay a little extra into the bond every month
- Cut down on unnecessary expenses
- Obtain advice from a home loan expert
Without a financial plan, anyone entering the property market for the first time will be like a ship without a rudder.
Buying a property is not only a rocky and emotional ride, it is also a sobering financial wake-up call for people seeking their first home.
Here are some tips on how to make the most of this journey.
Home Loan Tips – The property search
Many buyers fall into the trap of buying with their hearts and not their heads.
Remain clear-headed and buy what is affordable.
Firstly, obtain a Pre-Qualification Certificate from a home loan service provider to establish an affordable purchase price.
Now, pinpoint the desired location of the property and let the hunt begin.
If selling prices in the area are higher than affordability levels, select another suburb for the search.
If two living rooms and a swimming pool constitute the dream, but not the reality, settle for one lounge and a modest garden instead.
After all, this is a “starter” home and can always be sold further down the line when income levels improve to allow for a bigger and better home.
Home Loan Tips – The purchase
First-time buyers must have built-up a good chunk of cash before leaping into the property market.
Weighing up the options of bond periods is extremely important and should play a major role when purchasing a property.
- Deposits are required and can vary from 10% to 30%
- Bonds can be taken out for 20 or 30 years
Home Loan Tips – Let’s take a closer look
In this exercise, we have taken a R1 million property as the purchase price with a gross monthly income of R20 000 and an interest rate of 10.25%.
Now look at that this will cost:
- Deposit at 10% amounts to R100 000
- Bond costs amount to R50 066
- Monthly bond repayment over 20 years amounts to R8 834
- Monthly bond repayment over 30 years amounts to R8 064
The difference in the monthly saving on bond repayments is only R770.
However, over 30 years the property will cost R2 903 368 which is almost THREE TIMES the original purchase price.
Over 20 years, the total amount paid for the same property will be R2 120 349.
This constitutes a massive saving of R783 019.
If one deducts the R277 200 in money “saved” on the longer bond period, the buyer still ends up paying R505 819, which is more than half million for the same home.
Home Loan Tips – Don’t forget the extra payments
This repayment example does not include the additional payments related to owning a property.
Homeowners have to pay the municipality rates and taxes every year. This can be arranged with the local authority as a monthly payment instead of one large annual fee.
Homeowners must have an insurance policy to cover their debt in the event of death, total disability or extensive damage to the property, such as a fire.
Apart from the ever-increasing cost of water and electricity, there is also the expense of property upkeep.
These are all essential ingredients related to owning a property and present a sobering food-for-thought scenario.
Home Loan Tips – Another way to save on a home loan
One of the smartest ways to save on a home loan is to pay more than the stipulated monthly amount.
For example, using the details of the property described earlier, an additional payment of R200 a month will reduce the bond period from 20 to 18.65 years.
A R500 additional payment every month will slice three years off the life of the bond.
By paying extra every month, no matter how modest the amount, buyers will save themselves a small fortune in interest repayments.
This will be of far greater value than putting the same amount of money into a savings account.
Home Loan Tips – Why financial planning is essential
With the introduction of the National Credit Act (NCA) in 2007, South Africans had to take a good and hard look at their spending habits.
Prior to the NCA, it was far easier to obtain credit and deposits were not always required to obtain home loans.
Easy finance spawned a culture of reckless spending habits that left many South Africans with high debt-to-income ratios.
Statistics reveal that South Africans are not savers.
In fact, most of them do not have any financial plan for their futures.
The NCA has forced banks and home loan providers to carefully scrutinise credit applications to assess the likelihood of default payments.
This clamp down means that home buyers must become financially savvy by learning to manage their debt if they are to have any chance of obtaining mortgage bond approvals.
Home Loan Tips – Consult professionals
The best advice for first-time home buyers is to obtain advice from a financial planner before jumping into the property market.
Money can be saved on a monthly basis by simply:
- Drawing up a budget and sticking to it
- Driving an affordable vehicle
- Curtailing expenditure on luxury and unnecessary items
- Comparing prices before buying
- Reducing credit
- Eliminating unnecessary items added onto insurance policies and medical scheme contracts
- Cutting down on water and electricity consumption
- Restricting the amount of money spent at restaurants
- Cutting back on a DSTV package
- Stop making unnecessary cell phone calls
To enter the property market, consumers must become financially savvy.
They must buy within their means and attempt to pay a little extra into their bond repayments every month.
The best advice is to obtain guidance from a property loan professional.
Always opt for the shortest but affordable bond repayment period.
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All info was correct at time of publishing