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Need advice on financing a home? We answer this and other readers’ questions.
1. Can I afford a house?
Q: I am a 28-year-old teacher and I would like to apply for a home loan of about R550 000. The only debt I have is for a car. The repayments on the car, car insurance and a life insurance policy come to R5 000 per month. Is it logical for me to apply for a home loan of this amount?
A: The repayment of a home loan of that amount would be in the region of R5 400 per month. You also need to consider additional expenses such as mortgage insurance (this is life cover that settles your debt if something happens to you), building insurance, rates and taxes, electricity, water, and maintenance. As a rule of thumb these additional expenses add around 50% to your mortgage repayments so you need to calculate if you can afford to spend about R7 000 – R7 500 per month on a home. Keep in mind that if you do take a home loan, your home and car together would be costing you nearly R13 000 per month. So, you need to look at your current expenses and see if you can afford it. One way to stress test your budget is to live like an owner before you commit to the house. Work out the difference between what you are currently paying on rent and the R7 500 you would pay as a home owner. Take this difference and start to put it away each month to build up a deposit of R50 000. This deposit will reduce your mortgage or cover additional fees such as bond registration and municipal deposits. Moreover, your ability to save towards a deposit will prove to the bank that you have financial discipline and can afford the house, which could result in a lower interest rate on your mortgage. In undertaking this exercise, you will find out if you really can afford this expense without having already committed to the loan. If currently a home is not affordable, focus on paying off your car as quickly as possible – once that is paid off, your home affordability will improve.
2. Should I pay off my bond?
Q: I want to pay off my home loan over the next three years. I owe R224 000 and currently pay R3 050 a month. How much would I need to pay a month to achieve my goal, and is paying off the bond completely a good idea?
A: Assuming an interest rate of 11% a year, you would need to increase your repayments to about R7 400 a month. While paying off your bond faster is a good idea, make sure you are also putting money into your retirement fund and other long-term investments. Over time, these benefit from compound growth, so the longer you are invested, the greater the return. Once your bond is paid off, be careful not to fall into the trap of using that “extra” money to boost your lifestyle. Ensure you channel it towards creating wealth.
3. Is a revolving loan a good idea?
Q: I recently took out a revolving loan for the amount of R130 000, however, it does not feel like the monthly repayment is making any difference at all because my monthly repayment is R3 466, but the interest on the overdraft is R1 975.84 and there is an additional R239.25 for credit life insurance. What can I do? I want to pay it off as soon as possible as I feel this is a robbing game.
A: Revolving loans are dangerous because the repayment amount is just above the interest owed and, as soon as you have made a payment, the credit is available to you again so you don’t actually pay it off unless you are extremely disciplined. You could increase the amount you are paying so that it services a greater portion of the capital and therefore reduces the loan sooner. Alternatively, you could change it to a term loan so that you have a set date by which the loan must be paid off. This way, you know exactly how much you are paying and for how long. Try to pay as much as possible into the loan.
4. Should I invest or rather pay my debt?
Q: I am in serious debt, but fortunately I have R100 000 from savings. I recently qualified for a debt consolidation loan which allows me to pay one amount and which will be finished in four years’ time. I want to find a trustworthy company to invest the R100 000. The plan is to invest for two years then withdraw the interest only. This will help to ease the burden on the amount the debt is taking from my salary.
A: If you want to use the R100 000 to ease your debt repayments it may make more sense to pay a portion into your loan rather than investing for interest, as the interest you earn from the bank is less than what you pay the bank in interest. A good strategy would be to keep some funds for an emergency and use the rest to accelerate your loan repayment. For example, you could keep around R40 000 as an emergency fund which will ensure that you do not have to take out more debt in the case of an emergency. You could invest this amount in a 32-day notice account. Find out from your bank which account would give the best interest. You could then use the remaining R60 000 to accelerate the loan repayment. For example, if your debt consolidation loan is R200 000 and you pay off R60 000 you have two options:
It reduces your repayment from R5 668 to R3 967 per month over 48 months.You keep your repayment at R5 668 per month and settle the debt within 24 months. This assumes a 16% interest rate and does not include any additional service fees. The higher the interest on the loan, the bigger the impact the R60 000 would have on the debt repayment. Try to start saving each month into a tax-free savings account. You can start with as little as R300 per month. Once you are debt-free you can channel the money you were paying towards debt into the investment account.
