Thinking of buying your very first home?
I can only imagine how you must be feeling, because buying your first home is a BIG purchase decision that can be very overwhelming. It comes with second guessing every decision and the emotional rollercoaster ride “Do I qualify?” “Can I afford it?” “Is this the right time?” “Is this the right neighbourhood?” “Are there any hidden costs?”
This uncertainty can be extremely stressful, leading to a lot of panic. There is however no need to panic, if you have thoroughly done your research and are well prepared for this BIG purchase decision. In this article, I will share 2 things to consider before buying our first home.
Establish if you qualify and can afford the loan
Buying a new home is a long term commitment that requires a lot of planning and often doesn’t come cheap. It needs huge sums of money, which isn’t always readily available e.g. M500,000.00. The most viable option to finance the purchase of a new home for many people is through a mortgage bond (home loan) provided by authorised and licensed financial service providers (FSP). A mortgage bond is a loan that allows you to buy a home, payable over a period of time i.e. 20 years and charged at a negotiated interest rate.
Home loan, as it’s commonly known, attracts a lower interest rate compared to other forms of debt i.e. personal loans. The challenge however, is that many of people are afraid of home loans because they are long term financial commitments and deem them to be a “death sentence”. I mean, who wants to pay off a loan for 20 years? People thus end up opting for expensive forms of debt and being indecisive whether we should buy or not.
The first step in my view is to determine if you qualify, can afford the purchase of a house and what your credit scores look like. Despite the misconceptions about home loans, financing the purchase of a home using a mortgage bond is not entirely bad if you do your research and have honest conversations with your relationship bankers.
Your relationship bankers can help you determine your current financial positions in relation to your financial goals. They play an important role in helping you determine your affordability status and the actual amount you qualify for. This assessment looks at how much you earn, your disposable income, monthly expenditure, your account conduct, client risk profile and credit scores.
Other factors that are taken into consideration is your ability to raise an upfront deposit, where the property is situated and your job security. Why is this important you might ask? Well, because home loans are long term commitments, FSP want comfort that you will be able to repay the loan for the contract duration. So I would recommend that you have meetings with your relationship bankers to establish if you can afford buying the house.
Shop around for the best interest rate
The second consideration is shopping around for the best interest rate and home loans usually attract a lower interest rate compared to other forms of debt finance such as personal loans. Another advantage of home loans is their ability to appreciate in value over time. One should therefore never leave the negotiation table without having a discussion around how much interest rate will be applicable.
A significant number of people hardly ask their relationship bankers how much interest their loans will attract and seldom negotiate and/or shop around for the best rate when preparing to buy their first home. Why is it important to compare interest rates?
Interest rate is the annual percentage charged on loans by a FSP, which is usually based on the prime lending rate. The prime lending rate, currently 11% in Lesotho as at 3rd February 2020 is the interest rate FSP charge their best customers. For other customers, FSPs usually add a margin on the prime lending rate depending on their risk profile. Ideally this rate should be as low as possible.
A higher interest rate for example, would result in the borrower paying back a lot of money in terms of the interest on the outstanding capital amount. The table below compares two scenarios where two different borrowers had different interest rates.
|Loan amount||LSL 500,000.00|
|Loan term||20 years|
|Monthly instalment||LSL 5,418.54|
|Total interest payable||LSL 800, 448.48|
|Loan amount||LSL 500,000.00|
|Loan term||20 years|
|Monthly instalment||LSL 6,036.87|
|Total interest payable||LSL948,849.62|
Let’s assume that one is considering a loan of LSL500,000.00 payable over 20 years. If the FSP offered him or her an interest rate of 13.50% per annum, then the monthly instalment on the loan would be LSL6,036.87. Had he or she shopped around and/or negotiated for a better rate of say 11.75% per annum, he/she would have paid a monthly instalment of LSL 5,418.54 which is cheaper in the long term. This would result in an overall saving of LSL148,401.14 in interest that would otherwise have been paid had he/she negotiated a rate of 11.75% per annum.
So negotiating and/or shopping around for the best rate is VERY important. It is also important to mention that there are different types of interest rates i.e. fixed vs. variable and other factors that also influence the buying decision which aren’t covered in this article. I will be spending the next couple of articles diving deep into some of these factors that will help you prepare for the big buying decision.