If you want to start getting wealthy, do whatever it takes now to get a bond and buy a home. If you want to stay poor, get a personal loan and spend it on all the things that make you feel rich now. That’s the real – and simple - choice facing young South Africans at the moment, says Rudi Botha, CEO of BetterBond, the country’s biggest mortgage originator.
“Right now, too many people are confusing the trappings of wealth – like designer clothes and furniture, luxury cars and overseas holidays – with real wealth, which begins with acquiring assets that are going to keep growing in value.”
And this misconception, he says, is being fuelled by all-to-easy access to credit cards and huge personal loans as the banks show a preference for short-term, unsecured lending over long-term home loans that are secured by property. This is revealed in the latest figures provided by the National Credit Regulator, which show that the year-on-year growth in mortgage lending during the first quarter of this year was only 3,43%, compared with a 26,46% growth in short-term lending and a 49,40% growth in unsecured lending such as personal loans.
“However the truth is that nothing you can buy with a credit card or a personal loan – with the possible exception of a home improvement – is going to make you richer. Rather, this type of borrowing will systematically make you poorer because the goods you buy will steadily decrease in value to the point that they are hardly worth anything by the time you have spent a lot of money paying for them."
“What is more, being saddled with the high-interest rate monthly repayments on credit cards and personal loans will seriously inhibit your ability to obtain a home loan to buy your first home and start laying the foundation for your future wealth.”
Admittedly, Botha says, property values have not shown much growth in past few years, “but according to the conservative FNB House Price Index, real (after inflation) house prices were still 68.4% higher in July 2012 than in July 2000, while nominal prices grew 230.9% over the same period, and this type of growth is what people who buy a home now can expect over the next 10 to 12 years.
“And with the concept of gearing at work, homebuyers will benefit from the total increase in the value of their property, even if they have put down only a relatively small percentage of the purchase price as a deposit.”
This means, he says, that after just a few years, homeowners are able to borrow against the increased value of their asset should they need money for education, perhaps, or to undertake a home improvement that will further increase the value of the property, or even to put down a deposit on a second property. This is the way that homeownership works to help people to acquire more real assets and steadily create more wealth for themselves over the medium to longer-term that they can then pass on to future generations.
“Indeed, starting by buying a home is the only way for most young people, and especially those from previously disadvantaged backgrounds, to get ahead and gain a real stake in the future of the country, and it is imperative now that they be given better information before making financial decisions that will have far-reaching consequences for themselves and the economy as a whole.”