Shortly after they got married, Jack and Thembi decided to buy their first house.
Having shared a home with Jack’s parents for some time, they were ready for something more spacious and private. It only took a week of house hunting before they found their dream three-bedroom home in a leafy estate – just far enough from the family to ensure early-marital bliss.
Although the property was more expensive than they anticipated, it had a beautiful garden and since they were both great cooks, the newly renovated kitchen was a big drawcard.
They were convinced that they could cover the monthly installments quite comfortably if they cut back on some expenses.
Unfortunately, their dream soon became a nightmare.
Before they knew it, the hidden costs started to rear their head.
In reality, the house was a decent value at R1.9 million and although they could cover bond repayments comfortably, they didn’t cater for the initiation fees, transfer duty (since this property exceeded R900 000), conveyancing fees and a deposit with the body corporate of the estate.
Very soon the monthly levies and municipal rates also ballooned.
Simply stated, Thembi and Jack only factored in their monthly bond repayments of R19 600, excluding other monthly and once-off costs.
Their joint monthly income was R48 000, and after they paid all their crucial expenses, they were left with a paltry R1 800 disposable income.
Reducing their living standard also turned out to be considerably more difficult than they anticipated. They had to dig into Thembi’s savings for about 14 months before a final letter of demand from the body corporate for their outstanding levies convinced them to sell.
Unfortunately, the estate was on the decline for a few years due to the rising crime stats and the closure of two shopping malls in the area – something they were unaware of when they bought the property.
Ultimately, they had to sell the place for significantly less than they paid for it, leaving them out of pocket.
The experience taught them a valuable lesson – when buying property, research, ask the right questions upfront and be realistic about your financial position.
Thembi and Jack eventually approached their bank after selling their home and had a meaningful conversation about their needs and affordability.
Following regular discussions with their estate agent and bank and intense research, they finally purchased a home within their means.
The memory of their previous missteps looms large, but they are the lucky ones who managed to recover.
Unfortunately, Jack and Thembi are not the only people who have taken some hard knocks when buying their first property chich bodes the question: How do you avoid the pitfalls?
Get to Know Thyself
Long before you have picked the house or created a Pinterest board of all the décor changes you will make, you should start with you. Yes, you.
The journey of purchasing a home for the first time requires not just circumspection, but introspection.
You have to evaluate your attitude towards money, assets, life and home ownership itself. If you are buying a property with a spouse, family member or partner, you have to have transparent and intimate conversations with them too.
Discuss finances, and commit to what your joint approach to money, assets and lifestyle will be. This normally requires more than one discussion, and can be prickly, but the future benefit will be worth it.
What are your home needs? Do you need something practical and accessible? Do you want a garden or something that is low maintenance? Have you considered what would work best between free-standing and a complex and even what type or size of complex? Are you looking for a home for your current life-stage or for the future? Have you thought about where you want to live? Have you spent some time exploring the area you have identified (i.e. traffic dynamics and property values)? Is it growing? Is it a good investment?
Home-buying is a very personal experience, so it is only natural that there would be a lot of emotions and sentimentality involved. All the more reason to spend time interrogating and understanding your motivation.
Get to Know Thy Numbers
Recent insights clearly indicate that South Africans seem to be waiting longer before making large commitments like buying a home or trading up their car. Nowadays, the average age of first-time home buyers is between 31 and 35 (not the mid to latter twenties that most of us assume). Based on our insights, consumers seem to be taking real stock of the difficult financial climate they are facing.
This cautious approach to making big financial decisions has shifted buyer behaviour significantly.
Given that buying a home is probably the single largest purchase any of us will make in our lives, we are encouraged by circumspection. Add to that the exciting and daunting journey of purchasing a home for the very first time, and you have what is arguably one of the most emotional and intimidating financial transactions that a customer undertakes. So it’s only natural that as a home financier we are focusing on the needs and journey of first-time home buyers, making the process more seamless and convenient.
Right now, first-time home buyers represent about half of all home loan applications in the market. If we look at the average number of registrations of new properties, it means that about 200 people fulfil the dream of owning their own home for the very first time, every day.
Knowledge is power; you need to know your means if you want to buy and live within your means. Even if the news is bad, knowing what your affordability and credit score are, gives you the power to change it (or maintain it).
Prepare a detailed budget, review your bank statements and consider all your expenses, however big or small. Just like Jack and Thembi, we are often unaware of how the little things add up and derail our future. Remember to include those bills that are due on an annual or quarterly basis.
Make sure you are not already over-indebted and build a good credit record with manageable debt. A credit record will give you and the lender, a view of your entire lending history, from a short-term loan, to a cellphone contract to larger purchases like buying a car using a finance agreement.
Lenders use that to see whether or not you are likely to be responsible and repay your debt on time. This record also affects your credit score, which is the number that lenders use to identify high scores as very responsible borrowers. There are many things that can impact your credit score positively and negatively, but missed payments, late payments and other repayment issues will send your score plummeting.
Do you have savings in place to pay a deposit or the additional costs such as registration costs, transfer costs and attorney fees? There is a lot of potential saving in placing a larger deposit.
If the Reserve Bank hiked interest rates, would you be able to afford an increased repayment for your bond, and other debts like your car and credit cards? If you are not comfortable exposing yourself to fluctuating interest rates, a fixed rate option could be your solution.
If you do not already have insurance, consider taking up cover. This is not only for the asset, but also to protect your income so you can continue making payments for your home under any eventuality.
Use pre-approval estimator tools to get a ballpark idea of how much financing you could qualify for. Not being able to afford the instalment of your loan is worse than the fleeting awkwardness of being declined upfront.
Crucially, when considering location, do keep in mind the house price growth in the area. Most estate agents will be able to provide you with a report (generated from the Deeds Office data) of recent sales in the area. Ideally, you want to purchase in an area that has enjoyed house price growth in the past, and is expected to do so in the years to come. House price growth can never be guaranteed, but should definitely form part of your location criteria.
Get to know the process
Whether you are the first to own a home in your family or come from generations of homeowners, you need to take time to educate yourself on the journey that lies ahead. Many first-time buyers have assumptions based on other people’s experiences, and are often surprised along the way.
Use the tools available on your banking website and resources such as the Homeowners App. There is a lot of information out there, and it can be overwhelming. If any part of it seems confusing or does not make sense, go and get expert advice from a home loans industry specialist.
Lastly, before you start the home loan application process, double-check that you have all your paperwork ready.
South African banks and financiers have a regulatory obligation to lend responsibly and in line with the National Credit Act.
At the same time, there are a lot of initiatives and offerings that government, banks and lenders offer to make home ownership more accessible, so do everything possible on your part to put yourself in the best position to benefit from them.
Geoff Lee is the Managing Executive for Absa Home Loans.