You need a ‘big picture’ budget for home ownership
How much the bank will lend you is not the only thing to consider when you're applying for a home loan.
As a home buyer, says Rudi Botha, CEO of BetterBond, SA's biggest bond originator*, you also need to budget for the ongoing costs of property ownership, and ensure that you will be able to afford these as well as your monthly bond repayment.
"For example, once you take occupation of the property, you will be liable to pay for services like water and electricity, and once the property has been transferred into your name, you will also have to pay municipal rates.
"Failure to pay these amounts could lead to legal action and even to the property being sold to clear the debt. So before you commit to a property purchase, you should find out what the seller has been paying for municipal services and rates for the past year, and build this cost into your monthly budget."
In addition, he says, you should budget a monthly amount to maintain your home and garden if you have one. "Many people don't know this but keeping the property in a reasonable state of repair is actually a condition of most home loan agreements. And in any case, the long-term financial consequences of neglect are usually greater than the costs of regular maintenance."
There can also be substantial insurance costs associated with home ownership, notes Botha. "Financial institutions usually insist, for example, that the property itself is insured at replacement value - that is the amount it would cost to rebuild should it be destroyed by fire, flood or other disaster.
"This is known as homeowners' insurance (HOC) and most buyers just allow the premium to be debited annually to their bond account. However, paying the premium separately when it falls due can save thousands on the eventual purchase price of a home and buyers should also consider setting aside a monthly amount towards this."
Your lender may also insist, he says, that you take out life insurance to cover the balance owing on your bond in the event of death or permanent disability. This is known as bond insurance and premiums are generally payable monthly.
"And finally, it is advisable as a home owner to have short-term insurance that covers you for the loss of any of the contents of your home due to disaster or crime. Many people also elect to pay monthly for the services of a security company or make a monthly contribution to a neighbourhood watch programme."
Taken all together, these additional costs of home ownership can amount to almost as much as your monthly bond repayment, says Botha, and may in fact mean that you have to revise your ideas about what sort of property to buy.
"However, as a responsible originator, we strongly believe in prospective buyers applying for loans that they will be able to afford without financial strain - and buying a less expensive home is certainly a lot less difficult than losing a more expensive one - as well as one's credit rating - for the lack of proper budgeting at the time of purchase."