There's more to buying a home than interest rates

Interest rates are obviously an important consideration for anyone who owns a home or is planning to buy one - which is why the real estate industry holds its breath every time the Reserve Bank makes a rates announcement.

And the basic home loan interest rate has gone up steadily over the past two years, from 7% to 11,75%, which has made it more difficult for homeowners to keep up with their monthly bond repayments, and more difficult for buyers to qualify for home loans.

However, says Gerhard Kotzé, CEO of the RealNet property group, rates should not be the sole focus of prospective buyers. "There are several other factors that are just as important to consider, including your own family circumstances and financial position.

"For example, although it is expected that interest rates will start to decline again later this year, you might not have time to wait and see if this happens because your family is expanding and you need extra space right now. Or it could be that you have spent the past two or three years saving up a deposit and are eager just to start paying off your own place now instead of renting."

Of course, most homebuyers do need at least some bank finance to buy a home, so it is necessary to anticipate how interest rate shifts up or down might affect your monthly home loan repayment, your total household budget and your quality of life, he says.

"The rate at which you are paying interest on your home loan, together with the size of the loan to start with, will determine the monthly repayment. And whenever the Reserve Bank raises interest rates, that instalment is likely to go up - along with the monthly repayments on any other sort of debt you have, like car finance or a credit card balance.

"As a homeowner, that could put your budget under considerable pressure, which is why it is always a good idea to buy for less than the maximum you can afford and give yourself some financial leeway to cope with interest rate and other changes. It is also a smart move to pay more than the minimum monthly instalment when interest rates are low, so that the effects of any later rate increases will be minimised."

Meanwhile for home buyers, interest rates will often determine how much they can borrow in the first place. For example, if you want to apply for a R1m home loan at the current base rate of 11,75%, your monthly household earnings would need to be at least R37 000. But if the base rate were to fall to 10,75%, you would only need to earn around R34 000 a month to qualify for the same loan, assuming you also have a good credit record and not too much other debt.

Nevertheless, says Kotzé, you should not let concerns about future interest rate movements - up or down - get in the way of your home-buying plans until you have at least also considered the following:

- Are there good rental options in the area you want to live in? Depending on the type of home you need, there may not be much availability in your preferred area. "Alternatively, the overall supply of rental property may be so low, and the monthly rentals so high, that it would actually be cheaper to pay a bond instalment every month instead of rent."

- You like making your own decisions. You want to be able to make your own choices when it comes to paint colours, home security systems and when you can play music or let your children play outside. "For many home buyers, that kind of freedom is worth a great deal."

- You have a family and want to start putting down roots and having a stake in your community. You feel strongly that you don't want anyone to be able to disrupt that process by raising your rent, evicting you or just refusing to renew your lease.

- Do you have cash available now for a deposit and transaction fees? "If you could buy a home without needing a home loan, interest rate movements would of course not come into the equation. That is clearly not the case for most people, but if you can put down a substantial deposit, you would greatly diminish the effect of interest rates on your monthly bond instalments, your household budget and your lifestyle. You might also be able to pay off your home faster and save a small fortune in the process," he notes.

- Will the property you buy appreciate? "If you are buying your first home, you are probably not going to live in it long enough to pay off a large chunk of the bond. So the only way you are going to be able to build up significant equity and make a profit when you sell is if the value of the property grows. Researching whether this is likely to happen (or not) is just as important as thinking about interest rates."

And finally, says Kotzé, it is worth noting that when interest rates fall, property prices tend to go up due to increased demand. "This means that if you delay a home purchase now in the hope of more favourable rates within the next 12 to 18 months, you are very likely to end up having to pay more for the same home, and having to apply for a bigger home loan, which would negate the advantage of a lower rate."