When times are good and the cash is flowing steadily into your bank account, it is easy to apply for a 100% home loan which teeters on the brink of your affordability. This can become an inconsequential detail when your wife looks at you with those big brown eyes and says, "Oh honey, it's perfect and now we can finally start our family!”
The aforementioned financial detail can quickly become highly consequential when the interest rate has climbed by 5% or you have lost your job and had to apply for another at a lower paying wage. Those big brown eyes which melted your heart can quickly turn to dim fiery slits, threatening you with life altering consequences. It's not fire and brimstone for everyone, but there is a better alternative to think about before you make the decision to finance a property. Let's look at this in further detail.
So, our imaginary and happily married would-be property purchaser, Mr. Joe Blogs has decided to finance his dream house in an intelligent way. Firstly, he determines his affordability by checking in with his bank's home loan consultant. Sarah, who happens to be such a consultant at the first bank of imaginations, informs Mr. Blogs after carefully assessing his income and expenditure that he could apply for a loan of up to 1 million rand and at the prevailing interest rate, bond installments would roughly be R 10000 per month. Considering Mr. Blogs is presently paying a monthly rental of R 8500, this seems quite affordable. However, Mr. Blogs is not your average, imaginary would-be property purchaser and applies careful consideration to the banks offer.
Mr Blogs realizes that should his or his (big brown eyed) spouses income be lost, that they would have no way to pay the bond installments. If they were to rent the property out, there would still be a monthly deficit which they could not cover. The situation is similar if the interest rates were to rise significantly. So, Mr. Blogs dug deep, cringed, squirmed, rattled and saved some money over a period of 12 months; a princely sum of R 90,000 in total. Furthermore, Mr. Blogs found another suitable property at a price of R 900,000 and feels confident that his family will be in appreciation of it.
This transaction has the following effect on Mr. Blogs financial situation:
1. Instead of taking a 100% bond at R 1,000,000, Mr. Blogs has bought a R 900,000 property and paid a 10% deposit, leaving him with a bond of R 810,000.
2. Mr. Blogs is well within his budget and has spare cash to play golf.
3. A sudden change in Mr. Blogs cash flow need not mean that he will lose his property. Considering that his bond is only R 810,000, he could easily rent the property out and cover his bond.
4. Mr. Blogs could bear a significant rise in the prime lending rate without using up all his spare cash flow.
If you are going to buy a property, be sure to consult with your banker, financial adviser and a competent estate agent. Ultimately, you will have to live with your decision and bear the fruit or brunt of it. Finance your property smartly and live happily ever after!
Courtnall Machanick is a real estate professional with 10 years of experience in the South African residential property market. His expertise is specifically related to new residential developments and has successfully launched and sold out a number of these projects. He now consults to the most prominent property developers in the country and assists them to plan, market and conclude successful residential projects. His passion for real estate is visible in the quality of work he produces, the nature of prominent business partners who have aligned with him and that he avails himself to general public as a resource for property knowledge. He owns Chilli Property, a real estate firm for residential houses in Midrand.