Five money matters to manage before you buy a house

Owning property is among the top goals for many of us. And with interest rates the lowest that they’ve ever been and a persisting buyer’s market, there are some good deals available. However, buying a property shouldn’t be based solely on a good deal – your personal financial position is essential to factor into your decision to buy. Before you take the leap into the property market, here are five money matters that should be managed ahead of making such a large, long-term commitment.

  1. Have you truly assessed your budget?

Your income and expenses shouldn’t be a surprise to you. Being aware of every cost empowers you to budget properly – and sticking to your budget will play a big role in reaching your financial goals.  Before buying a new home, it’s important to assess how much of an impact the cost of repaying a bond will have on your finances and your standard of living.

Another point worth keeping in mind is that the South African Reserve Bank (SARB) has forecasted a 25bp (0.25%) increase to the repo rate (which is the rate at which the SARB lends to banks and impacts the interest rate your bank charges you) in the fourth quarter of this year, with the likelihood of further increases in each quarter of 2022 and 2023. This means that lending rates won’t always be as low as they are now. You need to consider how much you can afford to repay now on a home, as well as in the future, and that your other financed purchases (or debt) across your budget – not just on your home loan repayment – will also increase.

  1. Do you have an emergency fund?

Unexpected emergencies that affect your finances happen. But your home loan repayment will still have to be paid, so you need to be prepared. Access to funds that won’t incur debt will help to keep your budget on track. The rule of thumb is to save 3-6 months of your gross monthly income, and this can act as your emergency savings.  Owning a home is sure to come with at least one unexpected expense at some point from plumbing to electrical repairs, or general maintenance costs. Your insurance needs to be in place, but this isn’t the same as an emergency fund – it’s an additional, essential expense.

  1. Can you afford insurance?

Bonded properties tend to come with buildings insurance, but it’s still an extra expense and will usually be for the structure only. This won’t cover all your belongings, which require separate cover, and you may want to purchase life insurance to cover the cost of the bond if anything should happen to you or your partner. These are not nice-to-haves, but they certainly need to have a place in your budget.

  1. Do you have retirement savings?

Buying a home might be part of your retirement plan, but you need retirement savings as well. Some believe that they can retire after getting the proceeds from selling their home and downscaling at retirement, but this is a high-risk strategy as it’s difficult to predict property values in the future.

At the point of retirement, you’ll need as little debt as possible to help retain your standard of living –  it’s often the case that the income that you draw in retirement will be less than what you earned while still employed. When contemplating buying a new home, make sure the repayment period doesn’t overlap with your retirement years.

You are more than likely to need retirement savings separate to any property investment. Small contributions to your retirement savings can add up, but shouldn’t be forgone in place of home loan repayments. In the perfect scenario, you will have these funds already growing as you grow into your new home.

  1. Do you have a long-term mindset?

Property is typically considered a longer-term asset class. It’s generally going to take patience if you are hoping to earn a return. Some investors look to buy physical property with the aim of “flipping” it for a quick resale and profit, but this requires extensive capital, time, and a bit of luck. There are listed property investment options as well, which give investors exposure to property without having to assume the same level of risk as owning property directly.

In conclusion, while now may be a great time to purchase property given the low interest rates (and subsequent good deals) currently on offer, it’s important to take into account your overall financial position before signing on the dotted line. Assess your budget to be certain that you can afford the repayments, especially given the likelihood of interest rates increasing in the future. Make sure you have insurance and emergency savings in place for those unforeseen costs, and most importantly, don’t allow a “sweet deal” to sway you off course from reaching your retirement goals.