It’s common wisdom that investing in property over the long term is a solid investment. It’s better to use your money to pay off a bond and eventually own your home, than to be paying someone else’s bond off with your rental payments.
But getting onto the property ladder can be trickier than one might imagine. Finding a property, as difficult as that may be, is sometimes the easy part. This resource of property for sale in Cape Town will be helpful. The hard part is that many first-time buyers find themselves in financial difficulty because they did not anticipate all the costs they would encounter.
If the bank repossesses the property, they can sell it for very little and the owner will still be liable for the balance. This was recently confirmed by the Pretoria High Court in a judgement during March 2018. The case involved the sale of a repossessed house which had an insured value of R500,000 but was sold by the bank for just R40,000. The court ruled that this was acceptable.
There are two things you can do to make this unfortunate scenario unlikely. The first is to keep a financial buffer of at least 3 months, but ideally 6 months, of your monthly expenses. So if you generally spend R20,000 a month to cover your bond and other living expenses, then you should try and have R120,000 stashed away (in your bond to benefit from the interest saving).
The second thing you can do is accurately calculate what you can afford to spend monthly and make sure you don’t purchase a property that will force you to pay more than what is in your budget. What makes this tricky is that there are many costs that first-time buyers are not aware of. We’ve listed a number of these costs below. Try to take these into account when you’re doing your budget and you should be in a more secure financial position and able to weather the occasional challenging times you may experience.
From renting to owning
Those who have rented for many years are often surprised by the additional costs faced by people who own their own property. Some examples of these new costs you will have are:
Rates and water – Many renters do not pay for rates and water; these costs can be quite substantial depending on the area in which you live.
Levies – If you’re buying an apartment, you will have to pay a monthly levy for the maintenance of the apartment block. These vary from block to block but can also be quite substantial, especially if there are things like elevators that need regular maintenance.
Special levies – If the apartment block you’ve bought into has an unusual expense, for instance they decide to paint the block, you will be required to contribute via a special levy.
Maintenance and repairs – Renters are not responsible for paying for the maintenance of the property they are renting. But once you own your property, all the maintenance expenses will be for your own account. The older the place is, the higher these will likely be.
Moving to a bigger and better place
If you’ve owned a property before, moving to a new area or a bigger place can come with increased monthly costs which you should plan for. Here are some examples to consider:
Insurance – Your new place probably has a higher value, which means increased insurance.
Rates – These will increase for higher value properties.
Travel costs – if you’re moving further away from daily destinations like work or schools, your fuel budget will need to increase.
Costs of purchasing a property
Apart from the bond repayment on the loan amount, there are additional expenses which need to be planned for:
Transfer fees – While there are no transfer fees for houses valued at less than R900,000, you should be aware that these fees can become quite substantial as a house’s value increases beyond that threshold. Read more on these fees here.
Conveyancing fee – Property transactions will require the involvement of a conveyancing attorney. Remember to shop around as these rates are negotiable.
Bond initiation fee – If you are bonding your new property, the bank will charge you an initiation fee.
Interest rate increases – If you’re not opting for a fixed interest rate, allow for the fact that your interest rate could increase and affect your monthly bond repayments.
Life insurance – Banks will require you to take out life insurance so that the bond is still paid if something happens to you. This will be an additional few hundred Rand a month.
Moving costs
Simply moving from one property to another can be expensive. Don’t be caught off-guard; make sure you have some extra cash to cover these costs:
Movers – You’ll probably need to hire movers to transport your stuff. This cost can be small or large, but either way it won’t be insignificant.
New furniture and appliances – You’ll find that not all your old furniture will fit in your new house. For example, your fridge may be too big for the space in your new kitchen which means you’ll need a new fridge.
Other costs
If you’re lucky, that’s all you’ll have to deal with but, depending on your circumstances, you could face some other very ugly costs:
Evicting tenants – This happens particularly with houses bought on auction. You’ll need to go through a process to evict current tenants and, if they are not cooperative, this could become a drawn out and expensive exercise.
Initial maintenance – Sometimes you can move into a place and make renovations or changes over time, but other times you need to make some of those changes before you can move in. Renovations are not cheap!
Double bond / rent – While you’re evicting tenants or fixing up your new property, you’ll be paying the bond on the new place plus the bond or rent on your old, which can be a big hit.
All these costs can be quite intimidating, but don’t let them put you off buying that property. Just make sure you’ve budgeted for them and then you can be confident that you should be fine, even if things don’t go smoothly.
For more info on purchasing property, check out Private Property, who asked me to write this article, and particularly this article, Planning For Homeownership Success.