Proper financial planning crucial when buying property

When Luthando* bought his first home in 2015 he went in blindly with a lot of excitement that made him lose sight of how the purchase would eventually affect his pocket.

Luthando is one of many young South Africans who, after making some few bucks, hopped onto the upward bandwagon of pursuing property ownership in order to live comfortably with their families in an asset that carries a lot of potential investment in future.

However, many chased this dream without digging in deep to check if their pocket could withstand their purchase. Many end up losing their homes due to being in arrears and this is mainly because of poor financial planning prior to buying the property.

Luthando, 39, had moved to Johannesburg from the Eastern Cape in 2012 with his wife and two-year-old daughter. They lived in a two-bedroom flat in Boksburg. He has been working as a car salesman in East London and was promoted to a senior position and transferred to the main branch in Johannesburg. Things were looking good for him.

“I was doing well and the money was flowing in and after two years in Gauteng I decided that we should consider buying property and stay here permanently,” he said.

“To be honest with you, I didn’t know much about buying property. For me it was learn-as-you-go so I’d talk to friends and colleagues who own homes. The only thing that I’d pick up from them is that I should save up for transfer costs, which I did,” said Luthando.

He proceeded to buy a two-bedroom house in Boksburg to the tune of R600,000 with monthly instalment of R7,000,  which is about R2,000  higher than what he had been paying for rent.

“It was the happiest moment of my life but it soon turned into a nightmare as I realised that my salary of R30,000 would not keep up with other costs that I had not budgeted for, such as rates. Suddenly I had to pay an extra R4,000 to cover for things like insurance, levies, security and maintenance, which stretched my budget. I had to let go of certain lifestyle expenses like going out and booze.”

However, as time went on his pocket could not keep up and he started defaulting on his bond until he had to let go of it and go back to renting.

According to the law, if you default for three months or more on your monthly home loan payments the bank may repossesses your house and sell it to recover the outstanding money owed. The existence of Covid-19 saw many people losing their homes because their slashed salaries could no longer cope, despite government interventions.  

“There was nothing much I could do to save the house from being repossessed. It was the saddest moment in my life and having to go back to renting. I think with better financial planning preparation and knowledge about owning a property I could have done things differently. I had to start all over again with a black mark on my credit score,” said Luthando.

Real estate experts have always cautioned that new home-owners often fall into Luthando’s trap of rushing into buying property without getting a full understanding of what the financial realties and implications are.

Before you start looking for a property you need to have an idea of what you will be able to afford. There are a number of additional costs that are incurred when buying and taking ownership of a house and these may come as a shock to a first-time buyer.

In mitigating some of the financial stresses, regional director and CEO of RE/MAX of Southern Africa, Adrian Goslett, recommends that we all look at what we can live without for the short term and where we can make financial sacrifices in the form of our lifestyle choices.

“There are several household expenses that can be lowered over this period. While it might take some effort to cut back on these expenses, homeowners will need to do whatever they can to make sure they keep up with their bond repayments or risk having their home repossessed by the bank,” he cautions.

Some of his recommendations include:

• Ask your bank for a payment holiday on your home loan and/or other debts.
• Negotiate a better deal on the interest rate on your home loan.
• Shop around for a cheaper life, home and car insurance policies.
• Find a more affordable medical aid policy.
• Cancel any unessential streaming subscriptions.
• Cancel or pause any club memberships, including gym fees.
• Purchase more affordable brands when grocery shopping.
• Downgrade your cellphone contract or switch to pay-as-you go.
• Downgrade your internet connection.
• Find ways to lower your water bill (examples include reusing grey water to water the garden, only doing your washing when it’s a full load, etc.).
• Temporarily stop expensive habits like alcohol consumption and smoking.

“While giving up these things will be challenging, I encourage South African homeowners to practice good spending habits and financial discipline to avoid getting into massive debt,” Goslett said.

Often, defaulting on bond repayments leads to one’s credit record being tainted, which may affect other financial future plans. Defaults are not as bad as judgments or bankruptcies.

Property practitioner Sarah-Jane Meyer says a drop in your credit score does not mean you have to permanently give up on a good credit score – and future home ownership.

She suggests that one must regularly check their scores from credible credit bureaus online. “This will give you a clear picture of your credit position, highlighting which areas you need to work on to get yourself back to a good credit record.

“Pay off the defaulted debt. This may temporarily worsen your credit score as you will have less money to service other debts. In the long run, though, it will prevent more adverse information on your record. In some cases, defaulting on a loan can still harm a credit report – even after bankruptcy. This can happen with debts such as student loans and child support. So, if you default, it’s still best to pay off the debt, even if you’re late.”

Other ways to bring your credit score back to life.

• Create a more favourable debt-to-limit ratio by paying down debt overall. This is a great way to get a better credit record while getting rid of the debt that made you default in the first place. It can also help you get into better financial shape when it comes to savings.
• No matter how tempting it sounds, do not take out several small-limit credit cards. More credit cards in your name can give you a slightly higher credit score, because of the higher debt-to-limit ratio. But this only works if you can service the new debt, which you probably can’t at present.
• Consider getting professional help. A financial adviser should be able to offer guidelines for getting your finances back on track. Debt review should only be considered as a last resort. Going under debt review will negatively affect your credit profile.

*Not his real name