Many people were caught out during the Covid years when interest rates were lowered, believing they could either purchase a bigger property than they might have before the lockdown, or were suddenly able to enter the property market with their then current savings. When interest rates began to climb, so too did their home loan repayments, which put many at risk of losing their new property.
How much you can afford at any given moment is relatively uncomplicated and may raise levels of excitement, but what about the future? The property you buy today using a home loan may prove unaffordable in the future given any number of possible scenario’s that come into play.
For instance, how secure is your income? Are you intent on raising a family, which comes with any number of costs? Are you going to be retiring in the next five years? Have you accounted for any health conditions that may impact on your funds? And what of annual increases across the board to things like municipal charges, insurance, and subscriptions/contracts you may have?
There are hundreds of considerations, and there is no crystal ball that can accurately predict shifts in local and national economies that can also impact on the value of the Rand in your pocket, nor how the cost of living will rise.
Risk approach
All investments carry some risk but you need to weigh that risk against the most likely return on investment. If you buy an affordable property today, it is likely that no matter how your circumstances change, you will be able to sell it in the future for a higher price than you paid. In other words, you are hedging your risk of purchase against the probable higher value when the time comes to sell that property.
Banks do their own analysis of risk and once you have disclosed the required personal information, they can determine how much they are prepared to loan you for a property purchase. However, before you even approach a bank, you are well advised to do your own affordability calculations, which will go a long way in avoiding disappointment on a home loan application.
Inputs for the calculator
Private Property’s calculator is a useful tool to start with. They ask for your gross and net income, and expenses, and it applies the current interest rate, although you can change that if you want to do a future analysis. It also requests the number of years you anticipate having a home loan.
Gross income is whatever you are earning before any deductions (including, for example, income from a rental property or a monthly investment payout), and net income is what is left over after deductions, like tax and pension contributions. Expenses include all other costs such as credit card payments, groceries, rent/levies, fuel, school fees, etc.
The trick is to be really objective and honest about your finances. One common error is forgetting to add any annual payments you make; such as licences.
Real benefit
An affordability calculator helps you to refine your property search and even better it gives you a very good idea of how much more you may need to save for a deposit, which will also influence your property affordability. It can also help you to identify where you may be wasting money so that you can change that scenario before you apply for a home loan.