It comes as no surprise that having a well-planned budget is essential for anyone looking to purchase a home. The effective management of finances is the best way to avoid debt but takes discipline and a few sacrifices to implement.
Often, the word budget is met with negativity in our minds as it usually means restrictions and cutbacks. However, homeowners should think of their budget as a useful tool for reaching financial goals and paying off a property, thereby releasing them from the financial burden of a bond.
Benefits of a budget
Having a proper plan on how to spend the money you earn can show you where you may be overspending. It gives you total control of your finances and an objective look at your financial habits, which is useful if you are unsure how you are spending so much money each month. This understanding can reduce a lot of stress.
Sticking to a budget forces you to make smart financial decisions, such as where to spend it and how much you can save. It will also reduce your dependence on credit cards and loans for unnecessary expenses.
When beginning the budget process, try to include an emergency saving account. Start putting enough money away to cover four months of living expenses, in case you lose your job or are injured.
Budgeting to buy a home
If you’re looking to save up enough money to buy a home, start the process a couple of years in advance – it usually takes two years to save up enough money to make an offer on a house. By having a good budget planned out on paper, you will be able to see how much you can afford after two years.
The first step for someone planning to become a homeowner is to raise their credit score by paying off old debts and overdue bills. A low score can encourage banks to raise your mortgage rate, or prevent them from offering you a home loan at all.
Paying off debts should take priority over saving money because the interest rates on the debt will only increase, making the total repayment value climb. By reducing your debt, you are showing the banks that you can manage your finances appropriately.
In the lead-up to purchasing a home, make mock mortgage payments into your saving account. This will grow your savings and give you a feel of whether you can afford that amount of money every month.
What are you budgeting for?
Purchasing a house is one of the most costly things you will do in your life, but the rewards are worth it. These are the typical costs you can expect to incur during the process:
- Deposit – Banks will usually need between 10% and 30% of the purchase price of the home as a down payment. This percentage can fluctuate according to your credit score. The full sum of the deposit needs to be in your account and paid upfront to the transferring attorneys.
- Initiation fee – This is charged by the bank at the beginning of the loan process. It is a once-off fee that can be paid upfront or added to your loan amount.
- Transfer duty – This is the next biggest once-off payment to bear in mind after the deposit. Transfer duty is a tax paid to the government for the transfer of ownership and is directly linked to the price of the property. Properties priced below R900 000 are exempt from transfer duty, but this may change at the government’s discretion so look at the SARS website for the latest transfer duty rates.
- Transfer costs – In addition to the transfer duty, the transfer cost is a sum of money paid to the conveyancing attorneys who handle the transfer of ownership documents. The attorneys will register your ownership with the Deeds Office and give you legal ownership. It is also a once-off payment.
- Bond registration costs – In order for the bank to ensure some security over the property while you are paying off the bond, they will register a mortgage bond that gives them certain rights. The bank’s lawyers will do this registration at the time of the transfer. The buyer has to pay for the bank’s lawyer fees.
- Occupational rent – This fee is only payable if you move into the home before the transfer of title deeds has taken place. This rate will be laid out in the Offer to Purchase documents.
- Moving costs – Your budget should include the fees to pay removal companies for their services in relocation you to your new home. FInd a company that offers good rates and is trusted with moving valuable items.
- Insurance – Factor in the costs of homeowners and life insurance coverage so that the bank’s loan will be covered in the event of a total loss of property or death. The banks will require insurance before giving you a loan, and it will also protect your family from having to incur your debt to the bank. Although it’s not a requirement, it is highly encouraged to insure the contents of your home against fire, flood and theft.
- Rates and additional taxes – Once the transfer is completed and the property is in your name, you will need to register for rates and taxes. Water and electricity bills will need to be addressed to you and the municipality will need a deposit to begin this process.
- Total cost of ownership – Additional fees for services, such as garden maintenance, painting, refuse removal and security, should also be factored into your budget. These ongoing costs of homeownership are often forgotten, so remember to include a rough fee for these at the start of the budgeting process.
This may seem like a lot of additional expenses, but seeking the help of an estate agent will make it easier. They will be able to give you accurate estimations of these costs and will be able to shed light on any hidden costs that are likely to spring up.
How to start a budget
- Look at your payslips – Record the total amount of money flowing into your account each month, whether it’s from a salary, commission, freelance work or other sources of income.
- Gather financial statements – Record your monthly expenses for bank accounts, utility bills, cellphone bills, insurance, gym memberships and so on. This will let you know what needs to be covered every month.
- Document your other expenses – Write down other monthly expenses such as groceries, drinks, entertainment and restaurant spending. Allow yourself a small budget to cover these expenses.
- Categorise your expenses – Now that you have a list of what you are spending your money on each month, break these expenses down into two categories; fixed and variable. Fixed expenses stay the same, month-on-month, such as gym memberships and cellphone bills. Variable expenses change, such as utility bills.
- Income vs expenses – If your total income is more than your expenses, you are doing well. The excess money in your account can be allocated to your budget and savings. If your expenses outweigh your income, then you need to think about making some changes to your spending habits. Try to balance your income with your expenses so that all of your money is allocated to something. Preferably, you want to be putting your excess money into a savings account or a bond repayment.
- Track your budget – Every month, track your expenses and income and make sure that you are sticking to your budget. There may be room for improvement every month, so keep working at it until you have the hang of it.
Stick to these guidelines and you will make the journey to ownership a more pleasant experience. You will greatly reduce your stress by anticipating the costs associated with owning a home and having enough money set aside to cover these costs.
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