How much home can you afford?
But the burning question for many of these first-time buyers is how much they can afford to pay so that their monthly bond instalment will remain manageable – and the rule-of-thumb followed by most lenders and originators is that a new home should not cost more than 2 to 2,5 times your annual household income.
If, for instance, your combined annual salary is R360 000, you should be looking at houses in the R720 000 to R900 000 range at most in order to ensure that you can comfortably afford the monthly home loan instalment.
At the current base home loan interest rate of 9,25%, and assuming you paid a deposit of 10% of the purchase price, this home price range would give you a monthly instalment on a 20-year bond of between R5935 and to about R7420.
However, in terms of the National Credit Act, lenders have to take several factors other than your monthly income into account before they can approve your home loan application.
For example, they will usually also consider income ratios and stipulate that your monthly bond payment, including the principal, interest, tax and insurance, should at most not exceed 25 to 28% of your household monthly income before tax deductions.
Then they will look at your discretionary income (what is actually left after taxes and your regular expenses) and your personal debt-to-income ratio. Generally they would prefer to see that all your monthly debt repayments, like the instalments on your car or credit cards, do not add up to more than 36 to 38% of your income.
In the light of all this, the easiest way for you to determine your limits is to establish your monthly after-tax income and subtract all your expenses, excluding rent but including debt repayments and other essential and regular items such as groceries, school fees, transport, utilities and medical expenses.
The amount left over is what you would have available to cover a monthly home loan instalment as well as home maintenance and you will be able to calculate if it equates to 25 to 28% of your gross income. (Ideally, it should be much more than that, so you will be able to pay more than the minimum instalment every month and get your home paid off much faster.)
On the other hand, this exercise will give you a good handle on whether your debt repayments are eating up too much of your income every month – and whether you will need to cut down your debt load before you can think about buying a home.
Meanwhile, you should also make some provision for fluctuations in interest rates. Rates in SA have been at historically low levels for many years now, but it is predicted that they will start to rise towards the end of this year, and this will push up the minimum monthly instalments on home loans, so you need to ensure that you would still be able to afford your repayment if this should happen.