Do you know if you can afford a house or not?
It’s safe to say, as years go by, the white-picket-fenced dream has hit you some time or another – with pets playing in the backyard, children running up and down the stairs or you simply sipping tea while the setting sun’s rays stream between the garden trees – is still something you may long for. If this is the case for you and you want to buy a home in South Africa, one of the first steps is finding out how much you can afford.
As much as you might want a home loan, being realistic about how much you can afford will save you a load future financial worries and troubles. Home loan affordability assessments mainly look at your income, expenses, interest rate to determine your repayment capabilities.
Affordability assessments first look at your income which includes salary. However all salaries are not the same – some are fixed, some are commissioned based and others are both. Then many salaries include allowances, bonuses and overtime.
Most of the above factors are variables taken into consideration when applying for a home loan. For example, bonuses are only paid once a year and commission can vary from month to month, so how does it affect your ability to repay the loan? Once again, being realistic and truthful about how much you can afford for a home, is essential in the financial long run.
As with income, personal expenses is also something to be very clear about. Most people would like to play it down but this may not be a true reflection of reality. Expense questions include:
- What are your monthly instalments on debt repayments such as your credit card or car instalments?
- What are your living expenses? this includes water, electricity, food, medical, maintenance, education and transport.
- What are your other expenses? Such as Satelite TV, gym membership, insurance and prepaid airtime
Determining Your Interest Rate
After your income and expenses are checked, banks then move toward determining your risk profile which has a vital impact on your interest rate. Whether you have a deposit or not, is crucial for your risk profile and can either push up or lower your interest rate. Once calculated, your home repayments will fall under your overall expenses.
Also, taken into consideration are many buffer expenses which are either part of your mortgage agreement or incurred over the years on other expenses. These include increased interest rates on car instalments, home insurance, municipal rates and taxes to name a few.
The most important lesson when it comes to working out whether you can afford a home or not, being truthful and honest about how much your income and expenses.