5 Critical Factors to Identify Before Buying a Home Research into the property market in South Africa has revealed that there are 5 mistakes made repeatedly by many home buyers. Surprisingly, this is not limited to first-time buyers, as even experienced, veteran buyers can make these mistakes.
- Bad credit management You may not realise it, but every time you purchase an item on credit, you are creating a credit profile. Financial institutions will use that profile to determine how much money they will lend you when you request a loan. If you pay off your debts in the manner that you commit to, your credit rating is automatically raised. If you mismanage your credit purchases (making late payments, having payments bounce etc.), your credit rating will be adversely affected.
A great way to build up a good credit rating is to obtain store cards with a small credit limit. When you need to purchase from these stores, do so on your card and then make sure you pay the required amount.
Warning 1: If you fail to pay the outstanding balance in the time allotted, this process will reduce your credit rating instead of increasing it!
Warning 2: You do not need a large amount of credit on these accounts to increase your credit rating. Stores may offer you more credit than you initially anticipated.
Know your credit limits Not knowing the approximate loan value a financial institution will grant may cause issues when looking for a home, because you will have no idea what you can afford to buy. A simple, open discussion with your current bank can give some insight into your credit standing and your approximate credit limits.
Short-sightedness. Knowing your motivation behind the purchase of a new home is critical if you are going to correctly determine the type of bond that will best suit your needs. There are a number of questions to ask yourself:
a. How long do you plan to live in this home? b. Are you thinking of extending your family in the next few years, and, if so, will this affect how long you stay in this home? c. What bearing will interest rate fluctuations have on your ability to repay your loan? d. What are your expected gains or reductions in your monthly income in the short term? e. Do you manage your current financial obligations well?
- Failing to read the fine print. There are various options available to you when you take out a housing loan. The more frequent your payments (or the higher your monthly repayments), the more it will shave off the bottom line of your loan. Simply paying a bit extra each month over a 20-year loan can save you tens of thousands at the end of the loan.
Ensure that you understand what the early payment benefits, risks and rewards are – just in case you come into enough money to pay the loan off quicker than anticipated.
- Realise financial institutions are there to make money! Financial institutions are not charity organizations; they are out to make money. They do this through 2 methods:
a. Maintaining a good client base. Their definition of a good client is simply a client that makes each payment in full as it is required. This being said, most people go through a rough month or two during the course of a 20-year loan. The trick here is to be 100% open and honest with your financial institution. Communication is key if you are having issues, and most financial institutions will try to assist you. A good, candid client is treasured by financial institutions.
b. Dropping bad clients. In today’s economy, a financial institution cannot afford to extend loans to bad creditors. Dropping clients is only done as a last resort, and the financial institution may have to auction your home to recover their losses.