Given the strict provisions of the National Credit Act, it is virtually impossible these days for prospective homeowners to buy at the outside margin of their affordability.
However, with prices still well off their boom-day highs and interest rates at the lowest level in almost 40 years, there are many new buyers who believe that now would be a good time to stretch themselves as far as they can to buy a bigger or more expensive home than they might otherwise have considered.
Says Berry Everitt, MD of the Chas Everitt International property group: ”The argument that prospective buyers most commonly use in favour of this strategy is that they would like to avoid the hassle and cost of moving to a bigger home later in life.
“And it is true that besides the actual removal charges, the costs of selling one home and taking transfer of another, including bond and legal fees as well as transfer duty, can total many thousands of rands. Add this to the time and stress involved in settling in at a new location, and taking on a bigger mortgage now might seem like a fair exchange for being able to 'stay put' later.”
But there are also several powerful arguments against such a decision, he notes. “Firstly, the property market is in a constant state of flux and values can go down just as easily they go up, while interest rates could and probably will start to rise again. Consequently it is prudent to always leave yourself a margin, not only so that you will be able to afford a higher monthly bond repayment if necessary, but also so that you will not end up in a negative equity situation if home values should fall.”
Writing in the Property Signposts newsletter, Everitt says homebuyers also need to be very realistic about their employment prospects. “Gone are the days when the average person could count on working for a company for 20 years or more and retiring on a comfortable pension, and yet the decision to take on a larger home loan now means you will probably have to produce income at the current level or higher for many years to come.
“So you need to be very confident that your job is secure, and also accept that your freedom to give it up and pursue a different career is likely to be very limited.
“And finally, if your reasons for buying a bigger home include the fact that you want to start a family, you need to be sure that you could still afford your home loan repayments if either you or your spouse were to stop working after you’ve had children.”
Thus a better strategy, he says, might be to buy conservatively now, and take advantage of the current 31 August 2012 low interest rates and bond repayments by channelling any money you can save into reducing the capital on your home loan and creating equity. That way you will have more secure tenure no matter what happens with regard to interest rates, property prices or job and family changes – and you will be able to keep more of the proceeds if you decide to sell.