If you’re considering buying a second house, or looking for a bigger space, there are a few factors you need to bear in mind to prevent your good intentions from becoming a costly setback.
Tommy Nel, Head of Credit at FNB Home Loans, says that owning a property or two could be a good step to start building wealth for households. However, before making this important financial decision, you must do the proper research to ensure that you know what you’re getting into.
There are three common scenarios that second-time home buyers often find themselves in: you are planning to buy on the condition that you first sell your existing house; you still owe on your current bond and require a further loan; your bond is paid up and you are applying for a new home loan.
Nel unpacks some of the important factors that second-time homebuyers should consider:
- Taking out a further loan – two home loans
When buying a second home, banks will perform a new credit and affordability assessment that meets the requirements of the National Credit Act (NCA). This will be based on your credit track record, household budget and ability to afford the minimum monthly repayments. Managing your own household expenses and property-related expenses on a second property, while repaying two loans may potentially leave you overextended and increase the likelihood that you won’t be able to honour your financial commitments. Know what you are letting yourself in for and perform the appropriate research in this regard:
- Factor in costs such as insurance, municipal rates and taxes, levies, property maintenance and repairs.
- Managing agents typically charge 8% to 10% for managing a property.
- It could be risky to assume that you will have 100% occupation on a continuous basis.
- The rental price needs to be competitive with other properties in the area. You cannot just take your bond installment, add other costs and expect to let your property for that amount. The market often dictates what you can charge.
- Conditional offer, subject to the sale of your existing property
This clause stipulates that a purchaser who makes an offer on a house must be given enough time to first sell their existing home. Moreover, there’s no guarantee that you will sell your home for its current market value. This could result in selling your property for less than its market value, unless you are patient and don’t get carried away with your desire not to lose the property you are trying to acquire.
- Paying up the first bond
This may not be a good idea from a tax perspective, as you would be unlikely to claim your interest deductions against rental income. Instead, it could be more beneficial to use some of the equity in your primary residence to get the best possible rate on your investment property by putting down a sizable deposit.
Source: FNB. Images: Pixabay