So, here’s a student: just finished college or university, achieved a degree and a major plus, a job! While the temptation exists for such a candidate to charge off and spend with abandon and acquire all those things that have been financially out of reach, a question has to be asked: what value will those things have in 10 years, or five?
What will have value, however, is an investment in the future, so it’s time to help the 20-year-olds to switch their thoughts from short-term benefit to long-term financial freedom.
Buying a home at a young age, and at the start of a burgeoning career, means investing in something that, passively, can transform their financial future for the better. It’s been proven over decades that property ownership, particularly homes that are well-maintained, always generate a return; it's rare that a property devalues!
Home ownership is traditionally not something that the youth give much thought to given a general belief that home ownership is a drain on income, a step only usually taken to prepare for marriage and family planning, ties a person down to one area or suburb, or is simply just unaffordable. None of these particular concepts are necessarily true.
Today’s housing market presents a range of affordable properties, from bachelor apartments to small starter homes, and the best thing is that they can be rented out to the extent that the rental income may even cover the monthly home loan repayment and homeowners’ insurance.
Lifestyle Creep
One of the reasons the youth aren’t considering home ownership or the ability to afford the purchase of a home is Lifestyle Creep, also known as lifestyle inflation. This is when financial resources are being spent towards maintaining a standard of living that includes the buy-in of luxuries that are perceived as necessities. For example, the latest, most trending mobile phone. Such a purchase is justified as being required to ensure connectivity to work, to social networks and the ability to have a computer in one’s hand. Yet a similar, cheaper product, may equally provide enough resources to do the same.
Lifestyle Creep is also about spending more than makes sense just to keep up with the spending habits of peers, and as more money is earned, so too emerges a pattern where more money is spent. A cycle of this nature can be ruinous at a young age, threatening their future ability to acquire credit.
Building a good credit profile at a young age develops a credit history that looks impressive to lenders that you may need to engage with in the future. This credit history is usually acquired through a car loan, a mobile phone contract, perhaps a small clothing account. Provided such a loan is paid back consistently and on time, a credit score rating can rise, and in so doing can manifest in a bank’s confidence to consider a youthful applicant as a good candidate for a home loan.
The under-R1-million advantage
There are such great deals currently, not least of which is a good interest rate and for homes under R1-million, with no transfer fees. Banks too have come to the party, offering calculators and advisors that aid with determining affordability, or at least guidance in how to manage finances enough to build towards a home loan deposit. There are even financial assistance packages like FLISP, a government programme that subsidises low-income owners with a 100% home loan, which removes the obstacle of needing to pay a deposit. However, prospective youth buyers must remember that the currently favourable interest rate will not remain the same for the foreseeable future, and will increase as the SA economy improves.
To give an idea of what may be affordable, bearing in mind that each bank or home loan lender has its own level of qualification, is that a minimum salary of R24 000 may qualify the individual for a home loan of up to R800 000. A repayment on a student apartment of, for example, R600 000 will be in the region of R4 500 a month, but this does not include homeowners insurance that is variable depending on the type and condition of property and fixtures, and nor does it cover potential maintenance challenges or repairs. However, a good financial home loan lender will be able to provide an estimate of additional costs inclusive of rates and taxes and those related to owning and maintaining a property.
What’s affordable and what are the traps?
A quick scan of bachelor-style student accommodation shows rentals to be in the region of R5-7000 a month, meaning that not only does this cover both the home loan and the insurance, but there’s extra money being earned, which can be invested into the home loan for a far speedier payoff of the bond, or into a savings account for something else, perhaps a great future holiday or payoff of an education loan.
What the youth market should be made aware of is not to buy into the trap of thinking that they should be buying a ‘forever home’: it’s a ‘first’ home, and doesn’t necessarily have to tick all the ‘dream or wants' boxes.
The first home should be considered as a kickstart to enable the realisation of the acquisition of the ‘dream’ home, and a small manageable property, with an affordable mortgage is likely going to get them closer to their dream than their Lifestyle Creep peers, who are in the cycle of earn more, spend more.
It’s also not wise to buy a property at the top of a budget because there is always going to be a need to financially manoeuvre through life’s unknowns and rainy-day emergencies. If it still feels like an impossible dream, the recommendation is to chat to parents and close friends who may be in a position to co-sign a home loan agreement, or assist with providing the deposit. Agents are also suggesting that the 20s home buyer candidate should even consider purchasing with another family member or friend so that the costs are shared, but under such circumstances these should be considered business deals and legal contracts should be in place to circumvent any negative future implications.
Consulting property practitioners and financial advisors and using online tools are highly encouraged. Property agents agree: one can never have too much information in this environment and it is going to help inform in making the right decision when the time comes to purchase the best value-for-money property.