Fully owning your home when you retire not only reduces how much you need to live on, but you can use your property to supplement your income in retirement, according to the 2017 Alexander Forbes Benefits Barometer.
This highlights the importance of buying property early in life and being able to manage the costs associated with homeownership.
Research by Statistics South Africa shows that South Africans spend about one-third of their income on accommodation. Although this includes paying for utilities, most of it is spent on mortgage bond repayments or rent.
Alexander Forbes says there is a need to change mindsets and provide crucial information to encourage more people to buy their homes.
“There is a need for improved information and support to potential homeowners on the importance of homeownership as part of a long-term retirement plan. Financial advisers and institutions should be encouraged to offer this as part of the service they provide their clients.’’
If you fully own your property when you retire, you can use the property to supplement your retirement income by renting out a portion of it, such as a flatlet or room. You could also release equity in your property by downsizing when you retire.
One way of funding a home is through pension-backed lending. The Pension Funds Act allows retirement funds to lend you up to 90% of your retirement savings to buy a home or renovate an existing one. However, whether this facility is available to you, and if it is, how much you can borrow, depends on the rules of your fund.
The benefits are lower interest rates and lower costs than a mortgage bond, and no bond registration costs. However, your fund credit determines the loan amount, so if you are young and have not built up substantial savings, the loan will be small and most likely insufficient to buy a home.
Alexander Forbes says young fund members are not able to use this facility effectively. “For example, a member earning R10 000 a month and contributing 15% towards retirement funding will have saved about R96 000, in today’s terms, after five years and R212 000 after 10 years.”
Another disadvantage is that if a you resign from your job and leave the fund, the bank has the right to call up the loan against the surety provided by the fund credit. For a full explanation of funding your home this way, including the pros and cons, see “How your retirement savings can open the door to owning a home” on the Personal Finance website.
HOW MUCH CAN YOU AFFORD?
As a guide, your mortgage bond instalment should not be more than 25% to 30% of your regular household income before tax and deductions, says Realtors International.
If your income is irregular – for example, you have your own business or rely on sales commission – lenders have their own formulae for calculating what they consider you can afford.
Realtors International provides the following example where both spouses work:
• Husband’s salary (before deductions): R15 700 a month
• Annual bonus (divided by 12): R2 000 a month
• Wife’s salary (before deductions): R12 200 a month
• Housing subsidy: R1 500 a month
• Total household income: R31 400 a month
At a 30% instalment-to-income ratio, this family should be able to afford a repayment of R9 400 a month, which means their maximum loan would be R800 000, based on an interest rate of 13% a year.
When you buy property, you typically need to pay transfer duty, plus a bond registration fee and conveyancing fees.
Transfer duty is normally paid through your conveyancer. The amount depends on the property price, working on a sliding scale: nil on properties with a value of less than R900 000; R65 000 on a property of R2 million; R387 500 on a property of R5m; and R937 500 on a property of R10m.