Many young people starting out their careers are faced with the choice of buying their first car or their first apartment. “And the answer might not be as straightforward as you might think,” says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator.
Pros and cons for both
“On the one hand, a car might make it easier for you to get around and improve your job prospects. You also need less cash upfront to buy a car and the shorter loan tenure makes this a less scary purchase”, says Rademeyer. “On the other hand though, a car is a depreciating asset while a property, generally speaking, will continue to appreciate in value and be worth more when you sell it than when you bought it. What’s more, if you choose the right property in a location that enables you to use public transport instead of a car, you can probably pay it off a lot faster.”
However, people are all different and there is clearly no one-size-fits-all answer to this question.
Things to consider to make the best decision for yourself
Considering the following issues can hopefully help you to find the right answer for your circumstances:
Which do you need more?
You might want both but which do you really need more? If you are living with family or renting cheaply with roommates but that means a long commute to work, you may feel that you really need a car right now. However, you should sit down and work out whether your current rental option is really the most cost-effective solution – and whether you plan to continue with it for the next few years while paying off the car. If you did not have to pay for a car, maintenance and insurance, for example, you might be able to live close to work even if you did have to pay more rent. In that case, you might even be able to save enough to buy a car for cash or even buy your own apartment sooner than you thought.
What can you afford, realistically?
There is often a big difference between what we want and what we can afford. If you decide that you would rather have the apartment, for example, you will need to save enough cash for the deposit and transaction fees. You will also need to make sure that you can comfortably afford the bond instalment, the monthly levy, the property rates and the insurance on your current earnings. If your finances won’t stretch to this right now, you will no doubt make choices that will help you either to boost your earnings or cut your living costs and start saving.
Consider your lifestyle
Some people really don’t mind renting but hate travelling on public transport, for example, and would always choose the car ahead of the apartment. For others, having a place they can call their own and not having to worry about annual rental increases is much more important, so they will naturally do whatever they can to buy the apartment and worry about a car much later. You need to be honest with yourself about what your personal priorities are and make your choice accordingly.
Deciding to buy a car or a flat are big decisions, not to mention huge investments, so you need to think long and hard before taking the plunge either way.
One of the mysteries of modern life is why so many smart young people seem to know so little about managing their money or building their financial future.
Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator explains: “Most of them aren’t aware of the importance of a good credit record until they apply for a cellphone contract, try to buy furniture on account or perhaps seek to finance their first car – and are turned down.”
What you do now will affect things later
“Even when young adults already have a bank account, a student loan account or an account at a clothing store, they often don’t understand that how they manage these accounts right now can have a really significant impact on their lives in future”, Rademeyer continues. “They may not think it’s a big deal to be overdrawn at the end of every month, for example, or to be erratic in how and when they pay their small monthly account instalments. The truth is that this all goes on their credit record and could really count against them when they want to access any further credit later on.”
Rademeyer notes that taking the time now to develop good credit habits even on “small beans” accounts and to build up a good credit profile could save them a substantial amount of money later on. “That’s because when lenders and credit providers look at credit records, they are not only checking to see how much credit you already have and whether you can afford another monthly repayment. They also want to see if you have a history of good credit management – like paying all your bills on time – and are generally a good ‘credit risk,’ who is unlikely to default on a loan, a lease or a hire-purchase contract.”
A good credit rating opens doors
“If you do have a good credit rating, it will not only be easier for you to obtain new credit but also to negotiate a preferential interest rate that could translate into significant savings. Currently, on a personal loan of R100 000, for example, your monthly repayment could be as much as R3000 or as little as R2100, depending on the interest rate the lender decides to apply based on your credit profile. That means you could save almost R54 000 over five years if you were able to get the loan at the right rate”, explains Rademeyer.
Similarly, you can save money on car purchases and 20-year home loans. “For example, the current variable home loan rate is 9,5%, and if you were granted a R1m home loan at that rate the interest over 20 years would amount to more than R1,2m. However, if you had a good enough credit rating to cut just 0,5% off that interest rate, you would shave almost R78 000 off the total cost of your home over 20 years.”
“In short, every little thing does matter when it comes to managing your finances, and the sooner you start to actively build a good credit record, the better”, he concludes.
Where to start?
One way to start, says Rademeyer, is to make sure that all your current bills are paid on time and in full. “If your rent is due on the first of the month, make sure you always pay it then, or the day before. If you have a clothing account or a student loan to pay off, make sure the instalments are always paid in full by the due date. If you have a credit card, you should only use it for small purchases and then pay these off completely at the end of every month.”
“Next, you need to establish an overall financial ‘game plan’ that will enable you to make smart spending and repayment decisions going forward. To avoid maxing out your credit card, for example, you need to be deliberate in the way you use it and work out a realistic timeline for paying any major purchases back. If it is going to take too long, incur too much interest or affect your other financial plans, you may want to rethink it – or at least put it off until you can pay cash.”
And finally, says Rademeyer, you really should start saving. “At the very least, open a bank savings account and start putting 10% of absolutely everything you earn into it. You might think of this as an emergency fund, a travel fund, a new-car fund or as a deposit on your own home one day – it doesn’t matter. What counts in terms of your credit record, and your financial future, is that being able to save some of your income every month is further evidence of your ability to manage your money really well.”
The recent student protests have focussed South Africa’s attention on the cost of tertiary education. Not only that, but people have also been forced to look at the impact that cost can have on the financial future of the students themselves, as well as their parents and others who pitch in to help them pay for their education or pay back their student loans.
“We obviously want the students of today to become the homebuyers of tomorrow,” says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator. The truth is that in SA, as in many other countries, many graduates are facing years of debt repayment before they can even consider buying a home. This is acknowledged as one of the main reasons that the average age of first-time homebuyers all over the world has risen from the mid-20s a decade ago, to the mid-30s now.”
The ripple effect
“Indeed, a very large percentage of young adults are now not even renting accommodation after graduating but continuing to live with their parents or other family while they tackle their student debt”, explains Rademeyer. “This is not only reducing the demand for new apartments and starter-homes, but it’s also limiting the ability of their parents to give effect to their own plans for retirement, which once again has a negative effect on the residential property market.”
Current estimates from the Department of Higher Education, he says, are that student debt to the universities is at least R5bn. “On top of that, there must be millions of Rands more owed to the banks in the form of student loans, so this is not a small problem. It needs to be addressed soon if we want the next generation to be able to become homeowners, to start new businesses and to better the lives of their families.
Addressing the issue of student debt
Educating people is a good place to start. “One way to address the issue, we believe, would be by ensuring that students and their parents are better informed about the implications of borrowing money to finance their studies, about the commitments they are making to repay those loans, and about any alternative study options that are open to them”, says Rademeyer. He feels that it is not likely that a totally free tertiary education will be introduced in the near future, and that since so many South Africans are firmly committed to the idea that education is the best investment they can make in their future, or that of their children, student loans are probably going to remain a huge part of SA’s financial landscape.
Being fully prepared to take on a student loan
“Traditionally, our banks and other lenders have looked pretty favourably on student loan applications, and the availability of such loans has proved invaluable to parents, students and the economy as a whole. It is vital though that the borrowers fully understand the need to service these loans correctly and on time, and to assess whether they can realistically afford the repayments, or expect to afford them once they graduate”, states Rademeyer. “If they cannot, they may have to consider other ways of obtaining more qualifications, such as working and studying part-time or online, or perhaps initially taking only specific short-courses to enhance their employment potential, rather than a full-time degree over three or four years.”
Whilst this may seem like a long way around to a better career, it really may actually be preferable. “Leaving university with huge debt or a bad credit record can undoubtedly hurt your prospects for years to come”, says Rademeyer. “At the same time, you could also be inflicting similar long-term financial damage on your parents or other family members who were only trying to help you.”
Student debt can greatly impact your financial future so it’s important to consider all the variables before choosing to take on a student loan.
In many ways, buying a new home is a “numbers game” – and the most important of those numbers is undoubtedly how much you can afford to spend. This differs for everyone and your best option is to seek help from a reputable mortgage originator like us and obtain a home loan pre-qualification. This will be based on your earnings, credit record and current debt load, and should give you a really good idea of your home price range.
Another very important number you must know is how much your ideal home would cost you every month – in total. When budgeting for this, you should include things such as:
- Property rates
- Municipal service charges
- Any levies payable
- Your monthly bond instalment.
Deposit and transaction costs
Next, you need to establish how much cash you would need to pay a deposit (if required), plus transaction costs such as bond registration charges, legal fees and transfer duty (if applicable). This can amount to quite a considerable sum and you may need to delay your home purchase for a while so that you can boost your savings to accommodate these costs.
How long do you plan to stay?
The fourth number you need to have in your head is how many years you plan to live in your new home. Experts advise that in most cases, it really only makes sense to consider buying if you are planning to stay put for at least five years or, preferably, longer. The reason is that if you’re going to sell again relatively soon, chances are you will not make a good return and you could even end up losing money, especially because property transaction costs are so high (even for sellers).
Fifth, you should know that 90% of all buyers today begin their house-hunt online, simply because it is the quickest and easiest way to get to know more about the areas you’re considering. You’re also able to see the types of homes on offer in your chosen area and do some serious comparative shopping. What’s more, you can search for information about local schools, transport services and community organisations – all without leaving your home or office.
How long has it been on the market?
Then finally, you should make it your business to find out how long the homes you are interested in have been on the market. Knowing this number can help you gauge whether or not other buyers believe the property may be overpriced or needs too much work. However, it is important to note that not all properties that have been on the market for a while should be crossed off your list immediately. Some may in fact have owners that are quite ready to negotiate a lower price – you simply need to ask. On the other hand, some homes may actually only need minor renovations to become your dream home for years to come.
This dream-turned-nightmare is by no means unheard of in real life and illustrates the need for the increasing number of consumers who are buying vacant building stands at the moment to insist on accurate information regarding boundaries, beacons and stand numbers.
Frankly, most property buyers are not in the habit of checking on these “technicalities”, because properties in established suburbs are usually very clearly demarcated by boundary walls or fences – and often described by street address as well as their original stand numbers.
And actually there is seldom any reason for real concern in such instances, or even when you are among the first buyers in a newly-proclaimed estate or township, where the developers or their agents have erected clear stand markers.
The trouble usually occurs during the second phase of selling in a new area – quite possibly by a speculator who snapped up a block of stands at the outset and believes the time is right to resell them.
By then, the original stand markers may well have been taken down, or moved or lost as a result of construction work on surrounding land, leaving a site plan as the only indication of where stands lie and their boundaries fall.
It is all too easy, in such cases, to mistake one piece of vacant land for the one next door, or to visualise a stand being bigger than it really is, or to write the wrong stand number on a sale agreement – and for you to end up owning the wrong stand and even building on it.
However, most property sale agreements do contain a clause saying the buyer has familiarised himself with the location and extent of the land he is buying, and in these circumstances you really should insist that the developer or agent make it possible for you to do this before you sign the agreement – even if it does mean calling in a surveyor and having new beacons put up.
Even in the current property market when there is less supply than demand in most popular areas, you would probably be very reluctant indeed to pay R50 000 or more over the market value when buying a home.
“But if you don’t take as much care when ‘shopping’ for a home loan as you do when selecting the property you want, you could easily end up paying at least that much extra for your home in the long-run,” says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s leading mortgage origination group.
“On the other hand, if you can cut just 0,5% off your home loan interest rate at the start, the savings on the eventual cost of your home could give your retirement savings a significant boost, or perhaps help to put a child through university.”
Although the current prime rate is 9,25%, he notes, most borrowers are only able to secure home loans these days at interest rates that are one or even two percentage points above this – or an average of around 10,75%.
“And at that rate, the total interest payable over 20 years on a R1m bond, for example, is around R1,44m. At an interest rate of 10,25%, however, the total interest payable over 20 years drops to R1,36m – or by R80 000.
“What is more, the lower interest rate will make your monthly bond repayment more affordable, creating the opportunity for you to pay more than the minimum and generate even bigger interest savings over the life of the bond.”
Of course, Rademeyer says, you will need to be in great financial shape to be granted a home loan at a preferential interest rate – and even then are not likely to succeed without the help of a reputable mortgage originator who will personally motivate your application and submit it to multiple lenders if necessary.
“And there is no ‘quick fix’ for a blemished credit record, so you should start polishing yours several months or even a year before you apply for home loan pre-approval.
Deal with any bad debt judgments against your name, and try to pay off any remaining debt until all your balances are down to 30% of your available credit. Don’t open any new accounts and, most importantly, pay all your bills on time, every month.”
In addition, he says, you need to save cash to cover a substantial deposit on your new home and the additional costs of purchase such as bond registration, legal fees and transfer duty if applicable. (There is no transfer tax payable on pre-owned homes priced at R750 000 or less.)
“Third, you need to work out home much you can comfortably afford as a bond repayment every month, then go through all this information with your bond originator to get an indication of how much you should be able to borrow – and whether you’re ready to apply for pre-approval at a beneficial interest rate
“After that, you will be able to go house-hunting with much more confidence, and secure in the knowledge that your dream home is not going to cost you more than it should in interest over the next 20 years.”
When you buy a new home, the bank will usually insist that you obtain a home owners’ insurance (HOC) policy to provide for the replacement of a property that has been damaged or destroyed by fire, flood, high wind, earthquake or other disaster.
Such policies often also provide insurance against less serious damage resulting from burst geysers, falling trees and collapsing garden walls and they are most useful for giving you peace of mind, as a borrower, that you will not end up having to pay off a home loan on a property that has been destroyed while also trying to pay for your home to be rebuilt.
However, most lenders will be less insistent that you take out life insurance to cover the outstanding balance of your home loan and pay it off in the event of your death.
Also known as bond insurance, this can make all the difference to your family at that time by enabling them to stay on in a home that is fully paid off, and you should thus consider it very seriously.
In addition, you should think about whether you just want credit life insurance for the bond or whether you should take an additional normal life insurance policy specifically for this propose.
If you decide on the former, also called decreasing-term life insurance, the coverage decreases monthly along with the outstanding balance of your home loan, which means that once you’ve paid off the loan, the policy will lapse and there will be no pay-out.
If you take out an ordinary life insurance policy, you can specify a fixed amount that matches or exceeds the amount of your home loan, and that will go straight to your beneficiaries in the event of your death.
The benefits of this type of insurance are that the pay-out amount does not decrease in line with your home loan balance, and that your heirs can use the pay-out at their own discretion, and keep what is left if they decide to use some of it to pay off the mortgage.
Interest is generally the biggest challenge anyone faces when paying off a home loan. Our BetterLife Home Loans CEO, Shaun Rademeyer, explains how a home loan of R800 000 at an interest rate of 9.25% can be paid off in 17 years instead of 20, and save you R178 000 (22% of your loan!), simply by adding an extra R500 a month into your bond account. At BetterLife Home Loans, we’re here to help you get the best out of your bond, so here are a few tips on how you can repay your mortgage faster.
A Comprehensive View of Your Finances
Before you even think of taking out a bond, get the rest of your finances in order. First, you need to ensure you have six-month contingency fund for emergencies in your savings account. Secondly, the more deposit you can put down on your bond from the get-go, the less interest you have to pay, so aim for a minimum of 10-20%. Thirdly, decide which of your assets are the most important – which of your investments will depreciate faster? For example: property always increases in value, whereas a car depreciates from the second it is purchased.
Split or Bi-weekly Repayment
First, check with your bank whether they charge for early payments. If they don’t, these two methods can shave years off your bond. You can pay this two ways: twice a month, or every two weeks. Twice-monthly payments mean that you’ll pay half your amount in the middle of the month, and the other half at the end of the month. This means that if your bond’s interest is calculated on a daily compounded interest basis, you’ll save quite a bit of money. The bi-weekly payments are even better. This may sound the same, but if you pay fortnightly you’ll be making 26 payments per year in contrast with 24 repayments per year on a split repayment. The bi-weekly option works even better. Here’s what you’ll save per plan on a R600 000 loan, charged at R 8.5% interest over 20 years (R5206, 94 per month):
Monthly “split” payment:
Paying R2603.47 on the 15th, and another R2603.47 again on the 30th of each month saves you approximately R50 per month over 20 years. This means you could shave two years off your bond and keep R11 948.85 in interest payments over your bond period.
The bi-weekly payment is really the ideal payment. You technically pay for a 13th month, but with a steady monthly or bi-weekly income flow you generally won’t even notice. You’ll pay your R2603.47 up to 26 times per year, meaning you’ll reduce your repayment term to just shy of 17 years, and also save R127 423 in interest.
Take a loan out for longer than you need
Interest is generally the biggest income-killer on a bond. If you’re tight on cash, rather take out a slightly longer bond than you need (just in case), but then pay it off as if you’re on a shorter bond. Take this example:
A R1 000 000 bond, at 9.25% interest over 20 years tallies to a total repayment of R2 198 080, and a monthly mortgage of R9158.67. Exactly the same bond over 15 years, however, ends up as R1 852 546.12, at R10 291.92 per month. Therefore, at a difference of only R1133.25 per month, you’ll pay your house off 5 years earlier and also save R345 533.88 in interest.
Simply round your payment up by a ten or a hundred – you are unlikely to notice the difference, but your bond certainly will. Put any extra money you have into your bond account: investment earnings, your 13th cheque, or even an inheritance. Savings account interest rates generally stand at 6%, whereas bond interest lies between 8-10%, meaning that you’ll actually end up losing 2% of your money annually by using your savings account rather than your bond. If you’re not keen to have your money “tied up” in your bond account, speak to your agent about getting an access bond.
An access bond is a way of putting all your extra money into your bond account and then being able to withdraw it at any time, so it functions like a savings account. This is fantastic for you, as you’ll be able to pay off your bond much more quickly, but still be able to access your money when you need it. BetterLife Home Loans offers access bonds, under the prerequisite that you have your repayments on a debit order and that you pay above the required amount per month, although each case is treated individually.
Play with the BetterLife Home Loan Calculator and see how you can save today, or simply call one of our helpful agents. If you would like more helpful information and tips on how to make you bond work for you, follow our blog here. BetterLife Home Loans is all about giving you the best bond we possibly can.