How much the bank will allow you to borrow is not the only thing to consider when you’re applying for a home loan.
“As a home buyer,” says Carl Coetzee, CEO of SA’s foremost home loan originator BetterBond, “you also need to be prepared for the additional costs of a property purchase, as well as the ongoing costs of home ownership.”
When you buy a home, the additional transaction costs (sometimes called the “hidden” costs) include property valuation, bond initiation, bond registration, legal and transfer fees, as well as transfer duty if you are buying a pre-owned property. If you buy a newly-built home you will avoid having to pay any duty because VAT will be built into the purchase price.
Then after you move into your new home, you will need to budget for additional ownership costs on top of your monthly bond repayment, including property rates, municipal service charges, insurance, security and maintenance.
The extra transaction fees can add up to quite a significant amount, on top of the purchase price of your new home, and you will usually have to pay them in cash to the attorneys handling the registration of your new bond and the transfer of the property into your name, Coetzee notes.
“On a home costing R1,5m, for example, the total of the additional transaction fees would be almost R85 000 – and that’s on top of any cash you might need to pay a deposit.” (See here to calculate the bond and transfer costs on higher and lower priced homes.)
He says that repeat buyers who have built up equity in an existing home will often use a portion of that equity to pay the transaction costs on their new home, as well as a deposit. “But given the ever- rising cost of living, it can be extremely difficult for young first-time buyers to save up such a large amount, and transaction costs can in fact be a major obstacle for those trying to enter the market.
“And in recognition of this, most of the big banks have now re-introduced first-time buyer home loans that include the transaction costs. These bonds are generally granted for 105% of the property purchase price – but buyers should be aware that they may come at a higher interest rate than other bonds.”
To obtain more information about such bonds and various other home loan options, prospective buyers should consult a reputable bond originator like BetterBond even before they start looking at homes to purchase, says Coetzee.
“We will make sure they are fully-informed about the total financial commitment they will be making, help them work out what they can realistically afford to pay for a home when they take the additional ownership costs into account, and then assist them to obtain pre-qualification for an appropriate home loan.
“In our experience, it is often better for first-time buyers to purchase a less-expensive property to start with, so that they have more leeway when it comes to the additional costs and possible future increases in interest rates.
“In addition, we believe it is always worth paying a deposit if at all possible, because it makes it easier to qualify for a home loan, can help buyers to qualify for a lower interest rate and saves homeowners a significant amount on the cumulative cost of their home over the 20-year life of the bond.”
For example, the buyer who pays no deposit on a R1,5m home and has a bond granted at the current prime rate of 10% stands to pay a total of R3,47m for their home over 20 years. The buyer who pays a 10% deposit on the same home (R150 000), stands to pay a total of only R3,13m over 20 years. (To calculate potential savings, see here.