Understand the hidden costs & risks
|The combined outlay of deposits, legal fees, transfer costs and insurance
add significantly to the costs of buying a home; while the structuring
of a bond can have expensive long-term financial implications too - factors
that are not always well understood by eager home buyers.
Saul Geffen, Managing Director of MortgageSA, South Africas leading mortgage originator says, Overlooking the hidden costs of purchasing and financing a property is a common error and poor structuring can cost buyers hundreds of thousands of rands over the life of the loan.
Geffen says there are factors buyers should consider to avoid making costly mistakes:
· Calculating Total Cost vs. Expected Return on Investment
Unanticipated costs can put additional stress on the home buying process and should be factored into the total return calculation.
Added to this, a higher interest rate on a bond adds hugely to the debt burden that needs to be paid off and is fundamental to the total cost calculation. Buyers should fully understand just how much they will paying back- this needs to be weighed against the expected return on investment. Paying too high a price for financing can dramatically reduce the attractiveness of the investment.
· The Cost of Purchase
Given that transfer and registration costs are linked to the value of ever-increasing property prices, these have become significant upfront costs.
The rule of thumb in calculating transfer costs is approximately 8% of the mortgage value a cost that needs to be taken into account when assessing the investors own equity in the property. Borrowers who have not made adequate provision for these costs often have to either reduce their intended price range, or rethink their financial alternatives.
· Financial Structuring
The cost of the bond is really what dictates the true cost of a home over time and steps should be taken to negotiate the best possible mortgage deal. Criteria that effect rate concessions for example include loan-to-value, bond size, and repayment-to-income. The loan-to-value ratio has a significant impact on how negotiable the interest rate will be, as it constitutes the amount of equity (the deposit) that the buyer is willing to invest in the property. Unbudgeted costs are the first to erode this equity.
· Bond that includes the up-front costs
Homebuyers can consider full mortgage financing options. Some lenders will even cover mortgages with costs (108% of purchase price), but this comes at a price of a low or zero interest rate concession. Also, 108% loans have strict lending criteria. Amongst other things, lenders will require a clean credit record, payment specifications (debit order), age specifications (to ensure that they are genuine first time buyers) and proven stable employment.
Geffen says that in these instances, buyers should calculate the actual expense of borrowing the full costs.
On a mortgage of R450, 000.00, the transfer and registration costs are R31, 881.00. Over 20 years, factoring in interest repayment, this will cost R78, 960.00 - monies paid to the lender that do not generate a return. The main factor to consider in this kind of financing scenario is the expected return on investment and ultimately, whether getting a foot in the property market outweighs the costs involved.
Insurance costs should also not be overlooked, as they are another essential part of owning and protecting the homebuyers investment.
Lenders require policies like homeowners insurance and in some cases life insurance as conditions to granting a mortgage. These need to be factored into the long-term costs of not only the loan, but the term of ownership. At its most basic, this mortgage protection policy can be as little as 5% of the monthly bond payment.
· Running Costs
The ongoing costs of owning a property can prove a barrier to real investment return. The homeowner is liable for maintenance costs, as well as the rates and taxes due on the property. Sectional title properties will also include levies. If these are not weighed against rental return and the capital return anticipated on the value of the property, the investment could become a liability.
Additionally, investors looking to cash in on their investment should anticipate paying up to 7.5 percent of the sale proceeds in estate agent commission, as well as up to 20% capital gains tax on the actual return realised.
Article from - www.cbn.co.za