Buying a first home is often described as a significant financial milestone, although the decision involves considerably more than replacing a rental payment with a bond instalment. A property is an illiquid asset that comes with transaction costs, ongoing maintenance obligations, insurance requirements and long-term debt, and while home ownership can form an important part of a broader financial plan, it should not be pursued at the expense of every other financial objective. For first-time buyers, the key is to determine what can be sustainably afforded, understand exactly what is being purchased, and enter the transaction with sufficient financial flexibility to absorb the inevitable costs that follow.
Start with what you can afford, not what the bank will lend
Bond approval should not be confused with affordability. A bank assesses whether a buyer appears able to service the debt within its lending criteria, whereas a financial plan must also account for retirement funding, emergency reserves, insurance, future children, travel, career changes and the other priorities competing for monthly income.
Before viewing properties, build a realistic home-ownership budget that includes the bond repayment, municipal rates, levies, insurance, security, utilities and routine maintenance. For a freehold property, it is prudent to set aside an amount each month for repairs and replacements, while sectional title buyers need to understand that levies can increase and special levies may arise where the body corporate’s reserves are insufficient.
Most home loans are linked to a variable interest rate, which means that repayments can rise when lending rates increase. Rather than testing affordability at the rate initially offered, calculate whether the household could still manage the bond if the rate increased by two or three percentage points, particularly where income is variable or dependent on bonuses and commission.
Prepare your finances before applying
A home loan application is assessed within the context of the buyer’s broader financial behaviour, including income, existing debt, monthly expenditure and repayment history. As such, prospective buyers should obtain their credit reports, correct any errors, settle unnecessary short-term debt where possible, and avoid taking on new vehicle finance, personal loans or retail accounts shortly before applying for a bond.
Obtaining pre-approval can provide a useful indication of the price range within which a buyer may qualify, although it is important to understand that pre-approval is not a guarantee. Final approval may still depend on a full affordability assessment, verification of supporting information and the bank’s valuation of the property. While a deposit can strengthen the application, reduce the loan-to-value ratio and potentially improve the interest rate offered, be cautious about using all your available cash to fund it. Owning a property without an emergency reserve can leave the household financially exposed from the outset.
Understand the full cost of the transaction
The purchase price represents only one component of the amount required. Depending on the transaction, the buyer may also need to fund a deposit, transfer duty, conveyancing fees, bond registration costs, Deeds Office charges, the bank’s initiation fee, valuation expenses, moving costs, utility deposits and immediate repairs. Under the transfer-duty rates applicable at the time of writing, no transfer duty is payable on property valued at R1.21 million or less, after which duty is calculated according to a sliding scale. Ideally, buyers should obtain a detailed cost estimate from the conveyancer before signing an offer, particularly as transfer and bond registration are separate legal processes for which separate fees may be charged.
Compare finance properly
A bond originator can submit an application to several banks and assist in negotiating the rate and terms, generally without charging the buyer because the successful lender pays the originator’s commission. Buyers should nevertheless compare the offers carefully, including the interest rate, monthly service fees, initiation fee, flexibility to make additional repayments, access-bond facilities and any insurance conditions, keeping in mind that a seemingly small difference in the interest rate can have a substantial effect over a 20- or 30-year loan term. The comparison should therefore focus on the total cost of credit and the conditions attached to the facility rather than merely whether the bond has been approved.
Conduct financial and physical due diligence
Online listings, virtual tours, mapping tools and property-sales data can help buyers narrow their search and assess whether an asking price appears reasonable, although they cannot replace physical inspection. View the property more than once, preferably at different times of the day, and pay attention to traffic, noise, security, surrounding development, access to services and the general condition of neighbouring properties. For sectional title property, request the conduct and management rules, recent financial statements, levy schedule, reserve-fund position, insurance details and minutes of recent body corporate meetings, looking specifically for planned expenditure, disputes and possible special levies. Importantly, estate buyers should understand the homeowners’ association rules and levy obligations, while freehold buyers should investigate title-deed restrictions, servitudes, municipal zoning and approved building plans.
Where a property practitioner is involved, buyers should request the prescribed mandatory disclosure form and ensure that it is attached to the sale agreement. While the form records defects disclosed by the seller, it is neither a guarantee of the property’s condition nor a substitute for an independent inspection, particularly where there are concerns regarding damp, cracks, roofing, drainage or unapproved additions.
Treat the offer to purchase as the contract it is
An offer to purchase is a binding legal document once accepted, and buyers should resist pressure to sign before understanding it fully. The agreement should correctly identify the property, purchase price, deposit, fixtures and fittings, occupation date, occupational rental, allocation of risk, compliance obligations and any repairs agreed to by the parties. Where the purchase depends on bond finance, the agreement should contain an appropriately worded suspensive condition specifying the amount of finance required and the deadline for approval. Remember, a so-called 72-hour clause is not automatic and operates only if included in the agreement – and buyers who are uncertain about any provision should obtain legal advice before signing, rather than attempting to resolve an unfavourable clause after the agreement has become binding.
Plan carefully when buying with someone else
Where unmarried partners, relatives or friends purchase together, our advice is to ensure that the financial arrangements are documented before transfer. The parties should agree on ownership percentages, deposit contributions, responsibility for the bond and running costs, what happens if one person wants to sell, and how the property will be dealt with following separation, disability or death. Further, the title deed, loan agreement, wills and any co-ownership or cohabitation agreement should support the same intended outcome. It is also important to understand the extent to which each borrower may be held liable under the bond agreement, regardless of any private arrangement between the co-owners.
Protect the plan after transfer
Once the property is purchased, the insurance arrangements should be checked carefully. Freehold buyers generally need building cover from the date on which risk passes under the sale agreement, while a sectional title building is generally insured by the body corporate, leaving the owner to arrange cover for household contents and any improvements that may not be adequately reflected in the scheme’s insured value. Buyers should also update their wills, particularly where the property is jointly owned or where financially dependent family members are involved. Also note that while additional bond repayments can shorten the loan term and reduce interest significantly, it’s important to manage the access-bond facility with discipline so that the home does not become a permanent source of lifestyle funding.
In closing, keep in mind that a first home should create stability and provide a foundation for future financial security. The most successful purchase is therefore not necessarily the most expensive property the bank is prepared to finance, but the one that allows the buyer to meet the repayment comfortably, maintain the property properly and continue building the rest of the financial plan.
Have a fantastic day.
Sue
