BUY WELL WITHIN YOUR MEANS

Many people who are looking for a house will ask the bank how much they qualify for. The following is an example of a typical calculation of a persons qualifying amount:

Total monthly income (gross): R22 000
Loan repayment not to exceed: 30%
Maximum payment according to limit: R6 500
Interest rate: 15 %
Maximum period: 20 years
Maximum loan amount: R500 000

A lot of people make the mistake of buying a house very close to the maximum for which they qualify. If you require 100% finance because you have no cash for a deposit, and you need the bank to add the legal fees and transfer duties to your bond, you will immediately be paying more than 30% of your total gross income towards your bond. If interest rates increase, the amount of your earnings left over after bond payments becomes even smaller.

It is vital that you do not buy a house that puts a strain on your cashflow from day one. To this end, we suggest the following:

1. Calculate the maximum house price you can afford, and then deduct 10% from this amount. This immediately ensures that you can cater for unexpected increases in interest rates. For example, if you can afford to buy a house priced at R500 000, do not buy for more than R450 000;
2. Pay instalments based on the higher amount (e.g. R500 000). You have already established that you can afford to repay this amount, so by doing this you are repaying extra capital from the first payment.

The following example illustrates the above:

Loan amount: R450 000
Interest rate: 15%
Period: 20 years
Instalment based on loan of R450 000: R5 925
Instalment based on loan of R500 000: R6 584
Reduction in bond term: 7 ½ years

If interest rates increase by 1%, the minimum instalment that the bank requires from you will be R6 260, however you are already paying more than this so you don’t face the problem that millions of others face in trying to find extra money each month to pay the higher bond instalment.