By Ryon Phernambucq
The recent unexpected 0.5 basis point increase in interest rates, on top of eight earlier rate hikes, has made it a challenging time for South African homeowners. Servicing a bond is a lot more expensive today than it was a mere 18 months ago.
Every subsequent increase in the interest rate has made it harder for families to keep the roof over their heads.
Homeowners generally do not qualify for a home loan at the prime interest rate, but assuming you do, the table below illustrates just how much more expensive bonds of varying amounts have become since interest rates started increasing:
Although homeowners are under pressure now, there is a widely held view among economists and other experts that they have faced the worst of the interest rate hikes.
Despite this, if you want to make the leap from being a tenant renting a home to a homeowner, it is advisable to always be prepared for a few interest rate increases. Your initial repayments should not be the absolute maximum you can repay.
Never underestimate additional costs
It is also always a good idea to consider the additional costs involved in owning a property.
- Purchasing a property costs money, and expenses include lawyers’ fees for registering your home loan or bond, transfer of ownership costs and deposits required for electricity and municipal accounts.
- Maintenance, insurance and other costs like security of the property could average as much as 1.5% of the value of your home per year. Maintenance is an important factor, especially if the property is older than 20 years. The buyer should anticipate that repair work will more than likely have to be undertaken on a regular basis.
- Consider monthly municipal rates and taxes to cover the services provided by your local municipality. These include sewerage facilities, road maintenance, street light maintenance and refuse collection, and these amounts vary from municipality to municipality.
- If you buy a home in a sectional title ownership scheme, remember that every owner is required to pay a monthly contribution to the body corporate - known as the levy. The levy essentially funds the day-to-day maintenance and management of the sectional title development.
- The fun stuff – gardens and a pool. These require ongoing upkeep, and this can be very expensive. It’s important to factor these into your financial planning.
If we factor in the above costs and took, for example, a property with a 2-bedroom house in Sunningdale, Blouberg, Western Cape for sale for R 1 880 000. In this example we used an interest rate of prime plus 2%, as it is typically rare to get an interest rate of prime on a home loan.
The more accurate cost of owning property in this example is:
Account for all the costs
Additional costs of owning a property and repaying a bond are important factors that should be considered before making a large purchase such as purchasing a property. Most importantly, you should consider whether, if or when interest rates increase, the property will still be affordable.
Ryon Phernambucq is an associate financial planner at Fiscal
This article was first published on Smart About Money.
** The views expressed do not necessarily reflect the views of Independent Media or IOL.
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