It may now be cheaper to buy than to rent, which is good news for first-time buyers who generally struggle to gain a foothold in the property market because of challenges around affordability, says BetterBond.
“For thousands of South Africans, owning their own home has always seemed like a pipe dream. In fact, the cost of property, particularly in urban areas, is often prohibitively expensive for first-time buyers,” the group said.
However, with the onset of the Covid-19 pandemic and the shifting market conditions, things look very different now.
The four interest rate cuts this year, which brought the prime interest rate down from 9.75% to 7.25%, sets the interest rate at the lowest it’s been in over 50 years.
Since the cost of borrowing is significantly influenced by the interest rate, this record-low interest rate alone means a bond is now more affordable for many aspiring homeowners, the group said.
“The viability of buying property in the current market is best understood when one considers that the average monthly rental in the formal market is around R7,800,” BetterBond said.
The cost of a bond on both a property purchase priced at R875,000 – currently the average bond size of the first-time buyer – and R1 million, is at R6,900 and R7,900, respectively, based on a rate of 7.25% over 20 years.
“What this highlights is that the monthly bond repayment on the cheaper property is less than the average rental amount, while the bond on the slightly bigger bond is almost on par,” the group said.
|Bond A||Bond B|
|Bond amount||R875 000||R1 000 000|
|Monthly repayment at 7.25% over 20 years||R6 900||R7 900|
|Difference between rent (R7,800) and bond||-R900||+R100|
Transfer duty, which is the tax payable by buyers and based on the value of the property, is another cost that needs to be taken into account.
Earlier this year, however, the threshold on transfer duty was raised to R1 million, which means that no tax is payable on the first R1 million. In the case of a property valued at less than R1 million transfer duty does not apply at all.
“Of course, the bond repayment is only the start of your expenses when owning property and is not the only consideration when calculating whether you have the disposable income to afford buying, or not,” the group noted.
“You also need to be able to afford rates and taxes, water and electricity, regular repairs and maintenance, and more.”
It said that, no matter the macro market conditions, affordability remains key.
“The general guideline, set by banks, is that your monthly home loan repayment should be around 30% of your gross monthly income, before tax and expenses. To this end an affordability calculator is a useful tool to determine what the monthly repayments on a loan will be, taking monthly expenses, the prevailing interest rate, and the repayment term into consideration.
“Now, more than ever, do your calculations and make every effort to Invest in your future by becoming a home-owner rather than paying off someone else’s bond,” it said.