Property a stable asset class, but make sure you know what you can afford befoe you take a home loan

Property a stable asset class, but make sure you know what you can afford befoe you take a home loan

With stock markets in seesaw mode, the stability of property as an investment asset class has once again come to the fore.

"House prices are expected to increase by 12% this year and while this may not be as high as in recent years, it still represents a good return" says Saul Geffen, Chief Executive of leading mortgage originator, MortgageSA.

Geffen says would-be house buyers or property investors who plan to finance their purchase via a mortgage still need to pay particular attention to issues of affordability.

"To make the best decisions you need to be sure you know the full financial impact of a mortgage on your personal finances.

"We have always put affordability at the forefront of the decision making process," said Geffen.

Geffen says many homebuyers tend to start from the premise that the banks and mortgage providers initially calculate the amounts that they are prepared to lend to creditworthy customers based on monthly repayments that equate to 30% of an individual or couple's combined gross (pre-tax) monthly income.

For example, an individual or couple-combined earning R 40 000 per month before tax may well be granted a home loan with a monthly repayment of R 12 000. Geffen says at this point many homebuyers approach mortgage originators to help them find the competitive interest rates on offer from the banks.

"Shopping around for a competitive interest rate will have a significant influence on your monthly repayment," he says.

But Geffen says that this is not the end of the story and advises those thinking about taking on mortgages to approach the affordability issue from the following perspective:

The full 30% probably equates to about half of your after tax income, and that's before you have paid any other monthly expenses

So, first work out a monthly repayment amount that you are comfortable with weighed up against your existing fixed expenses and with a clear understanding of the levels of variable monthly expenses you currently incur

If you are currently paying rent you can factor that into a mortgage repayment as it is an expense you won't have in your own home

Ask yourself if you have any money for the upfront costs associated with buying a home. If not, then these have to be factored into the home loan, which means there is less available to put down on the house. These costs can add up to around 8% of the value of the property

If you are a first-time homebuyer be aware of the other monthly fixed costs that come with owning a property. Depending on what you buy these costs can include:

rates and taxes you didn't pay before or body corporate costs and levies

maintenance and upkeep costs that you will incur

the costs of any additional garden, pool or house help you may need

extra commuting costs if you are moving further from your place of work and similar

Geffen says the prudent homebuyer will err on the side of exaggerating these costs so as not to be caught short later.

"There is a good argument in fact for saying that if you can afford to pay extra into your bond on a monthly basis or even a lump sum payment you should always try to push yourself to this commitment. For example if your required bond repayment is R 5000 and you pay R 5 500 per month, the extra R 500 will come directly off your capital amount owing.

"If you keep that up you will settle the bond far shorter than 20 years. In addition, you can take comfort from the fact that you have a bit in reserve in the event interest rates move up, or you incur unexpected monthly costs," Geffen said. You always have access to these extra funds but you are getting your money to work for you by saving on interest, which in the case of a mortgage has a compounding effect.

If you are considering upgrading your property, it is advisable to calculate your new increased instalment and then to pay that amount on a monthly basis into your old existing bond to determine the effect this new instalment will have on your monthly affordability. By the time you actually pay for the upgraded property you will not feel the 'bite' of the increased repayment because you've already factored it into your monthly budget.

MortgageSA provides online calculators that calculate transfer and registration costs and that can calculate the affordability of different bond scenarios at www.mortgagesa.co.za , or alternatively interested parties are welcome to contact the MortgageSA call center on 0860 0123 60

Hello ooba news

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R 20 million for a three bedroom apartment in Cape Town's V&A waterfront may seem like a ridiculous sum to pay by South African standards, but it compares favorably with Sydney and remains significantly cheaper than upmarket apartments in other international playgrounds.

MortgageSA, South Africa's leading mortgage originator placing one in five mortgages, said that the possibility of a fixed mortgage system, currently being discussed by the Reserve Bank, could be a double-edged sword for consumers.

With stock markets in seesaw mode, the stability of property as an investment asset class has once again come to the fore. "House prices are expected to increase by 12% this year and while this may not be as high as in recent years, it still represents a good return" says Saul Geffen, Chief Executive of leading mortgage originator, MortgageSA.

As interest rates rise, homeowners have an even bigger incentive to invest in their bonds, as they will be saving even more interest while benefiting from the secondary advantage of a shorter term of repayment.