How to Use Existing Property to Buy Another in South Africa: The Complete Guide

Article summary:

• Using your existing property to finance the purchase of another home in South Africa is a powerful wealth-building strategy.
• This guide explains how to leverage your property’s equity, navigate the bond application process, understand the tax implications, and choose between selling or renting your current property.
• We also provide practical examples, expert advice, and tools to help you calculate affordability and determine the best approach for your situation.

If you’ve been a homeowner for some time, your existing property could be the key to expanding your real estate portfolio in South Africa. Whether you’re looking to upgrade to a larger home, invest in a rental property, or diversify your assets, your current property can provide significant leverage.

Using your existing property to buy another isn’t just for wealthy investors—it’s a practical strategy that many South Africans use to build wealth through property. With the right approach, you can use the equity in your current home or its rental income potential to finance your next property purchase.

How to Leverage Your Existing Property: Two Main Strategies

When it comes to using your existing property to buy another in South Africa, there are two primary approaches:

1. Using Equity from Your Current Property

Equity is essentially the portion of your property that you truly “own”—the difference between your home’s current market value and the outstanding bond amount.

How equity is calculated:

• Example: If your home is worth R2 million and you still owe R1 million on your bond, your equity is R1 million.
• Formula: Current Market Value – Outstanding Bond Amount = Available Equity.

This equity can be a powerful tool when applying for a new bond:

– For a deposit: Using equity as a deposit can significantly improve your chances of bond approval and secure better interest rates.
– For bond costs: Equity can cover transfer duties, attorney fees, and other purchasing costs.
– For debt consolidation: Some homeowners use equity to consolidate high-interest debt before applying for a new bond, improving their affordability assessment.

2. Keeping Your Current Property as a Rental

Instead of selling, you might choose to keep your existing property and rent it out, using the rental income to help finance your new home purchase.

Benefits of the rental approach:

– Creates an ongoing income stream.
– Retains a property that may continue to appreciate.
– Builds a long-term property portfolio.
– Provides tax advantages through deductible expenses.

Example calculation:

If your current bond payment is R8,000 per month and you can rent the property for R10,000 per month, you’ll have R2,000 positive cash flow (before considering other expenses).

The Application Process for a Second Home Loan

Even though you’re an existing property owner, the bond application process for your second property will be similar to your first experience.

Pre-Application Steps:

1. Get pre-qualified to understand what you can afford.
2. Check your credit score and address any issues.
3. Gather documentation, including proof of income, bank statements, and your existing bond information.
4. Research the market to identify target properties within your budget.

During the Application:

The bank will assess your application based on several factors:

– Total debt-to-income ratio (including both bonds).
– Credit history and payment record.
– Current employment status and income stability.
– Existing bond payment history.
– Available equity or deposit amount.

Expert Tip: “Most homebuyers don’t realise that banks often offer better interest rates for loans with at least a 10-20% deposit. Using equity from your existing property to fund this deposit can save you hundreds of thousands in interest over the life of your new bond.” – James Mathews, Bond Origination Specialist

Key Considerations When Using Existing Property to Fund Another

Financial Readiness Assessment

Before proceeding, ask yourself these critical questions:

– Can you comfortably afford two bond payments if rental income temporarily stops?
– Have you accounted for maintenance costs on both properties?
– Do you have sufficient emergency savings to cover unexpected expenses?
– Have you considered the tax implications of your strategy?

Timing Considerations

Timing can significantly impact your success:

– Simultaneous transactions: Managing the sale of one property while purchasing another requires careful coordination.
– Market conditions: Is it currently a buyer’s or seller’s market?
– Interest rate environment: Current rates may affect your strategy

Risk Management Strategies

To minimise risk, consider these approaches:

– Maintain a cash reserve equal to 3-6 months of bond payments.
– Secure comprehensive insurance for both properties.
– Consider bond protection insurance.
– Evaluate rental demand before deciding to keep your existing property.

Understanding the Tax Implications

Tax-Deductible Expenses for Rental Properties

When renting out your first property, these expenses become tax-deductible:

– Municipal rates and taxes.
– Levies (for sectional title properties).
– Bond interest (not the principal amount).
– Insurance premiums.
– Property management fees.
– Advertising costs for finding tenants.
– Maintenance and repairs.
– Accounting and legal fees related to the property.

Capital Gains Tax Considerations

If you eventually sell a property that was used as a rental:

– Capital gains tax will apply to the profit.
– The first R2 million is exempt for your primary residence.
– Investment properties don’t qualify for this exemption.
– Careful record-keeping is essential for calculating the base cost.

Tax Expert Advice: “Keep meticulous records of all improvements made to rental properties, as these can be added to your base cost when calculating capital gains tax, potentially reducing your tax liability significantly.” – Sarah Johnson, Property Tax Specialist

Case Study: Using Equity vs. Keeping as Rental

Scenario 1: Using Equity from Sale

Property Details:

– Current home value: R2.5 million
– Outstanding bond: R1.2 million
– Available equity: R1.3 million

New Property Purchase:

– Purchase price: R3.2 million
– Deposit from equity: R900,000
– New bond amount: R2.3 million
– Monthly repayment (at 8.75%): Approximately R20,300

Benefits:

– Lower bond amount due to substantial deposit
– Single property to maintain
– No landlord responsibilities
– Potentially lower interest rate due to larger deposit

Scenario 2: Keeping Current Property as Rental

Property Details:

– Current home: R2.5 million with R1.2 million bond
– Monthly bond payment: R10,500
– Potential rental income: R15,000

New Property Purchase:

– Purchase price: R3.2 million
– Available deposit: R100,000 (savings)
– New bond amount: R3.1 million
– Monthly repayment (at 9.25%): Approximately R28,700

Net Financial Position:

– Rental income: +R15,000
– First bond payment: -R10,500
– Second bond payment: -R28,700
– Monthly cash flow impact: -R24,200 (before tax benefits)

Benefits:

– Building two assets simultaneously.
– Tax deductions on rental property expenses.
– Long-term wealth building through multiple properties.
– Potential for future price appreciation on both properties.

Steps to Securing Your Second Property

1. Evaluate Your Current Financial Position

Start by calculating:

– Your current property’s value (get a professional valuation).
– Your outstanding bond amount.
– Your available equity.
– Your affordability for a second bond payment.

Use the ooba Home Loans Affordability Calculator to determine what you can afford.

2. Decide on Your Strategy

Based on your financial assessment, decide whether:

– Selling your current property makes more sense
– Keeping it as a rental property is viable

3. Prepare Your Documentation

Gather important documents:

– Recent payslips
– Six months of bank statements
– Latest bond statement
– Tax returns
– ID documents
– Proof of additional income

4. Shop Around for the Best Bond Deal

Don’t simply accept your first bond offer:

– Apply through multiple banks
– Consider using a bond originator like ooba Home Loans
– Negotiate interest rates based on your strong equity position

5. Manage the Transition

If selling:

– Coordinate timing between sales and new purchases.
– Consider bridge financing if necessary.

If renting:

– Prepare your property for rental.
– Find reliable tenants before completing your new purchase.
– Consider property management options.

FAQ: Using Existing Property to Buy Another in South Africa

Can I qualify for a second home loan if I still have an existing bond?

Yes, provided your income supports both bond repayments and you meet the bank’s affordability criteria. Lenders typically want your total monthly debt obligations (including both bonds) to not exceed 30-40% of your gross monthly income.

Will banks consider potential rental income when evaluating my application?

Most South African banks are conservative and won’t fully factor in potential rental income when assessing affordability. However, if you can prove existing rental income with lease agreements and bank statements, some lenders may consider a portion of this income in their calculations.

What happens if I can’t find tenants for my rental property?

This is a significant risk when keeping your first property. Ensure you have sufficient savings to cover both bond payments for at least 3-6 months. Also, research rental demand in your area before committing to this strategy.

Is it better to pay off my first property before buying another?

Not necessarily. While having your first property paid off reduces risk, using the equity or rental income from a partially paid property can be a smart wealth-building strategy if the numbers work in your favour.

How does the bank value the equity in my existing property?

Banks typically require a professional valuation of your property. They may be conservative in their valuation and usually consider 80-90% of the market value when calculating available equity.

Conclusion: Making the Right Choice for Your Situation

Using your existing property to buy another in South Africa can be a powerful wealth-building strategy, but it requires careful planning and consideration of your unique financial situation.

Whether you choose to leverage the equity from selling your current home or use it to generate rental income, understanding the financial implications, tax considerations, and practical steps involved will help you make an informed decision.

For personalised advice on your specific situation, consider consulting with:

– A mortgage specialist.
– A tax professional.
– A property investment advisor.

Ready to explore your options? Get pre-qualified with ooba Home Loans today to understand what you can afford and start your journey toward expanding your property portfolio.

This article is meant for informational purposes only and does not constitute financial advice. Property investment carries risk, and individual circumstances vary. Always consult with financial professionals before making significant investment decisions.