If you are one of the people planning to start the hunt for your first house this year, there are a few points that you need to consider before viewing any properties. “Buying your first home will always be a big leap as it requires financial discipline and budgeting,” said Albertus van Staden, head of credit at FNB (First National Bank) Housing Finance.
However, with many challenges facing the country this year, including drought and water shortages, anticipated interest rate hikes, and credit downgrades by international ratings agencies, the need for budgeting and financial discipline may be greater.
However, FNB noted that not all of these factors are necessarily bad for home owners. Below are some tips from FNB to help you navigate the home buying market during a tough financial year.
Have a strong budget
As interest rates increase, so your home loan becomes more expensive. This is where budgeting becomes so important, as it can help you through any interest rate hikes. In order to prepare for any changes in the interest rate, van Staden suggested over estimating what the interest rate will increase to.
For example, by working out your calculations based on an interest rate increase of two percent*, you will have a cushion to shield you from any possible interest rate hikes. (*This is just an example and not a prediction of what the interest rate will reach.)
Van Staden gives the following example: On a R500 000 house at 9.75% interest rate, a two percent increase will mean around a R676 increase a month in your home loan repayments.
Prepare for costs increases
Not only do you need to prepare for possible home loan repayment increases, but other increases that may impact on your budget as well. When drawing up a budget it is better to have a long term view of costs, for example a year, and factor in possible cost changes.
“Don’t be tempted to take a short term view. Take an interest in your world around you and note of the expected increases in food prices, electricity and rates and taxes in your area,” suggested van Staden.
To help you plan for possible price increases, work out your budget and see how much you are currently spending on things such as food, electricity and rates and taxes. Once you have a figure to work with, take into account the possible increases.
For example, van Staden noted that food prices are expected to be about ten percent higher by the middle of the year. “This needs to be taken into account, if you currently spend R2000 on groceries, expect this to cost you R2 200 by June, if not more.”
Other possible price increases that you need to keep in mind are insurance costs. Once you have drawn up your budget and factored in the possible price increases, it will help you determine if you can afford to cover all expenses.
“If, with the proposed increases you can see there is even a small chance that you will start to struggle, consider reviewing your expectations, either buying a smaller property, or really cutting down on unnecessary expenses from the beginning of this year to build in a good buffer,” advised van Staden.
Check your credit record
When applying for a home loan, or any other form of credit, your credit record plays an important role. This illustrates your payment history (i.e. do you manage your debt well), as well as whether or not you can afford to take on more debt, such as a home loan.
A credit record also helps a credit or loan provider to determine how much you can afford to borrow. A good credit record can also assist you in getting a good interest rate on your loan.
However, van Staden noted: “The only way to do this is to prove to financial institutions that you are a reliable customer who has a low risk of defaulting. This means cleaning up any bad debt you have, repaying your debt commitments reliably and showing that you can save, by having a deposit ready.”
Furthermore, van Staden suggested that if you do not have the above in order, putting off buying a home until your finances are in a better state, and you have improved your affordability and credit record, might be a good idea.
Bargain hunting
With the current tough financial climate in the country, more home owners will be looking at downscaling. According to FNB, this could work in a new home owner’s favour, as the market may weaken in the near future.
“It is worth looking out for bargains in a softer market. You will need to do your homework before settling on your first home, this includes market research into current house prices and suburb prices,” said van Staden.
When you have identified something on the market that is worth buying, you should move quickly.
Rising interest rates good for saving
While the negative of rising interest rates is that debt, and therefore home loans, become more expensive, there is a positive side to it as well. Rising interest rates mean that the interest that you are earning on your savings is higher.
“Raising interest rates mean that you will earn more interest on any savings that you have put away towards a deposit. This means your money will work harder for you and put you in a better position when coming to actually buying your home,” highlighted van Staden.
Before starting the process of looking for a new home, work out what you can afford and make sure that you are prepared for any eventuality before putting in the offer on your first home.