Whether you are renting or buying, you will be paying for a roof over your head, which is best for you?
To buy or rent? This is one of the most recurring questions asked of any financial service provider. With borrowing rates on the increase since the lows of 2020, it really a great time to buy now?
This is questioned by Abdallah Moosa, Planner, and qualified actuary at Fiscal Private Client Services, a Cape Town based wealth management company. The philosophy the company follows is to give people advice that will help them make informed financial decisions that will respond to their individual life needs and goals.
There are a lot of variables that will influence the decision of a millennial – whether you are an individual, a couple or a young family. When weighing up the pros and cons of buying versus renting the age-old argument is that it doesn’t make sense to rent for years on end when all you’re doing is paying off your landlords bond. The common thinking is that property is a good investment, so it’s always better to buy but Moosa questions if this is always the case.
“While there is no one answer for everybody, there are aspects to take into account before deciding either way. These are the top considerations for millennial buyers before deciding between buying versus renting:”
Costs before ownership of the property takes place:
If applying for finance, property ownership comes with more than just a mortgage repayment. On purchasing your once-off costs could include:
- Transfer duties (not paid when buying new-build development property or on a property price below R1m)
- Bond registration fees
- Conveyancing fees for bond registration
- Conveyancing fees for property transfer
- Home loan initiation fee
- Sundries, postage, deeds office registry fees
Costs after ownership of the property has taken place:
On-going costs that must be considered and monthly budget items could include:
- Municipal rates and taxes
- Building levy (if the property is in a sectional title scheme)
- Maintenance and repair costs
- Ongoing home loan admin fee
- Building insurance for the property (required if you have a loan)
- Contents insurance and potentially a life policy to cover the outstanding loan
- The older the property the more expensive the upkeep. A pool, and a garden also take a lot of money to keep looking good
Future interest rate changes
The biggest risk for financing property now is the uncertainty of how interest rates will move in future – will it keep rising or reach a plateau? At the time South Africa entered a national state of disaster in March of 2020, the prime interest rate was at 9.75%. It reached a low of 7.00% in November 2021 and is back to a pre-COVID19 level at 9.75% today.
Since most home loan repayments are linked to prime, they will increase. This means your bond repayment can increase to a point where you can’t afford to make the monthly payment. For those that bought in 2021, they may already be at a point where they did not factor such a large increase in rates this fast. Some are now stuck with a property they can’t afford in a market that is tough to sell in. The other thing to remember is while the purchase price may be attractive, over the lifetime of the loan what you have actually paid (including interest) can total to significantly more.
Mobility versus Stability
Still indecisive? Moosa adds, the key difference between buying and renting is the type of mobility and stability that each option offers. “Renting allows you to be mobile, this is great for younger people who want to move to a different suburb, city or country giving the landlord a few months’ notice. Renting offers the flexibility which appeals to a lot of people.” At a time when many Millennials are looking abroad for work opportunities, and some with a view to emigrate then renting is definitely the way to go.
Buying a home is a more permanent decision and normally follows finding a partner and wanting to settle down and start a family, or getting a pet. Buying should be seen as a long term option as it is difficult to recover the costs related to purchasing when selling soon after buying, especially when factoring in the costs of selling a property.
These costs for the seller include a commission to an estate agent, conveyancer’s fees to cancel any bond over the property, clearance certificate for: municipal rates, taxes, building levy and electricity, compliance certificates for: electrical installation, electric fence, gas installation and water installation. The cost of moving also needs to be factored in, as this can be a substantial amount, especially when moving cities or countries.
Buying also offers you a stable environment and there is no threat of the landlord taking the property off the rental market and giving you notice to leave. You also have more freedom to make changes to the property, upgrades, renovations and adapting it to better suit your needs.
Moosa adds that, “When you sell the property and take into account all the costs related to buying, maintaining and selling, as well as the interest paid in financing the property – it may end up not being the ‘best investment’ when considering the return achieved. But instead of seeing property as an investment, buying a property should be a seen a purchase from which one derives benefit from.”
Moosa concludes that each of his clients are different, and his role is to assist in the decision making process, “It is possible to run the numbers to work out which option is best for you, your needs, and aspirations. Make sure that you are asking the right people for advice. This is a big decision and you should always seek guidance from an authorised and qualified financial advisor to help you settle on the right answer for you.”
For more visit: www.fiscal.co.za
