5 things first-time property buyers need to know
The monthly bond instalment isn't the only expense - so budget wisely
The recent cut in the repo rate by 25 basis points to 6.75% might be all you needed to go on the hunt for your first property, but there may be other factors in your favour too.
There are hints that the power of sellers to determine prices, or "seller pricing power", is diminishing, says John Loos, FNB economist and author of the Property Barometer, in the latest FNB house price index reports.
"In June, the estimated level of resale price deflation was 9.6% of total sales, which is not significantly different from [the] 10.1% estimate as at the end of 2016, and far below the revised estimated 22.66% 'peak of crisis' level of August 2009. However, delving a bit deeper, we may see some very slight hints that seller 'pricing power' is diminishing."
House price deflation is when residential property is sold for less than what it was purchased for. While there is always a degree of house price deflation in the market, in times such as the present, "when the market is weak and average house price inflation is low", it would be realistic to expect a higher percentage of homes being resold at deflated prices, according to Loos.
Here's what you need to know before you venture into the property market:
1. Your credit score
Before you even start looking for property, check your credit report to ensure that none of your accounts are late or unpaid. If you are three months or more in arrears on just one account, your record is classified as "impaired" and this has an adverse impact on your credit score. A default judgment - when you do not oppose a creditor's application for a court order on a debt - will have a worse effect on your score. It's not uncommon for consumers to have a default judgment against them and not know about it. If you find any inaccuracies on your credit report, you can dispute the listing with the credit bureau and it will investigate. It must report back to you within 20 business days. If it refuses to remove information that you claim is incorrect, you can lodge a complaint with the credit ombud.
The value of a blemish-free credit report and a strong score can't be overstated. The higher your score, the stronger your position when negotiating for a good interest rate.
2. What you can afford
All banks have online affordability calculators that can give you a good idea of how much you could qualify for, based on your gross income.
For example, if you earn a gross monthly income of R30000, the calculators estimate you would qualify for a home loan of R927000. But that doesn't mean that you can afford to buy for that amount. The instalment on such a home loan is R9000 a month, assuming the bank lends to you at an interest rate of 10.25% (the current prime lending rate). But if you don't have a deposit, or your credit score is not great, the bank may charge a much higher rate.
Only you know what you could comfortably afford as an instalment. Also bear in mind that the bond repayment is just one of the many monthly costs you will be liable for. You also need to account for insurance, a levy (if you buy into a sectional title scheme), rates and taxes and maintenance costs.
When you know what you can afford, don't extend yourself to the limit. Allow some margin for interest rate increases.
Adrian Goslett, CEO of RE/MAX of Southern Africa, recommends looking at homes below your maximum limit, so that you have the edge on other buyers in a multiple-offer situation. In addition to a home loans calculator, Nedbank offers an online instant bond indicator, which is a three-minute assessment including a credit check. This gives you a more accurate assessment of what the bank could offer you. However, it does not constitute an offer or pre-approval for a home loan.
3. The value of a good deposit
A few years ago banks often granted home loans of 110% - the full purchase price plus extra to cover all the buying costs. These days most banks want a deposit of between 10% and 30% of the purchase price. But that doesn't mean you will not get a 100% bond.
Statistics from bond originator BetterBond, which administers 25% of all home loan applications in South Africa, indicate that only a third of home loans approved over the past month were for 100% bonds.
Most buyers are putting down deposits nowadays. BetterBond CEO Shaun Rademeyer says that in July the average purchase price was R1.1-million, the average home loan R880000, and the average deposit R182000.
"Sometimes applications are rejected on the basis on no deposit. A deposit shows you're willing to put your money into the property and so the bank will give you a better rate, because they are taking on less risk." The bigger your deposit as a percentage of the bond, the smaller your loan-to-value ratio, which means you are a good risk to the lender. BetterBond stats show that the average interest rate granted on a 100% loan is 11.50%, and that on a bond with a 75% loan-to-value ratio 10.50%.
4. How much to put aside for costs
Unless you make specific provision for the costs associated with buying property, they will make a big dent in what you save for your deposit.
According to BetterBond's app, costs on a R1-million property will amount to R47678: R27589 for transfer costs and R20089 for bond costs.
As the buyer, you pay two sets of legal costs: the cost of transferring the property from the seller's name into yours, and the cost of registering the bond in your name.
Buying costs include:
- Transfer duty, which is a tax levied on every property sold for more than R900000;
- Conveyancing fees, which are payable to the attorney who attends to the transfer;
- Bond initiation fee to the bank;
- Bond registration fee; and
- Deeds office fees.
5. Why location is everything
Experts agree that location is the most crucial consideration when buying property because it is the biggest determinant of a property's potential to grow in value.
Buy in an area that has or is close to good schools, major transport routes, shopping centres, business nodes and medical facilities, even if you yourself don't need these facilities. Also find out about crime in the area. Rademeyer says location is key for the bank too. Should it need to repossess the property, it wants to be assured of being able to sell it, and a property in a sought-after area is more likely to sell.