Because public transportation is so unreliable, many South Africans choose to buy their own vehicle. Rather than opting for an affordable one, many are opting for vehicle finance to pay for it. As one of the most expensive forms of debt, it can inevitably delay the ability to take out a home loan.
“The mindset of many South Africans needs to change as they invest in assets that are increasing in value instead of investing in assets that are falling in value. It is better to invest in assets that have steady and stable growth over the medium to long term, even if they do not reflect significant month-to-month or year-to-year percentage growth. And to be honest, there isn’t much better than a home in that regard, ”said Adrian Goslett, RE / MAX Regional Director and CEO in Southern Africa.
“I wouldn’t recommend spending your hard-earned savings on something that will be devalued immediately when you pull it off. Instead I would take the same amount of money – R400,000 or whatever – and put some or all of it on a deposit and get your foot in the home door, ”he recommended.
Carl Coetzee, CEO of BetterBond, agreed that with a current rate of seven percent, it is the ideal time to apply for a bond for this dream home.
“Buying a home is a long-term investment in an asset that can result in significant capital growth over time.” Homeownership is also an important step towards financial freedom, Coetzee added, as it provides some form of forced saving that can be used in the future to buy a better home or for other purposes.
Often times, the interest on an auto repayment is higher than on a bond repayment, although the term for a bond is usually much longer. Repayment of the bond of R700,000 at seven percent requires a monthly installment of R5,400 over a period of 20 years. A car payment for the same value and also with seven percent interest is 14,000 R over a period of five years.
“While the bond will take longer to repay, the benefit is that you have a roof over your head and an asset that will pay off, so a bond is a better choice,” Coetzee said. “The bond makes up almost a third of a vehicle’s monthly payment and is a much better investment option since cars are typically a depreciating asset.”
With more people working from home due to the pandemic, interest in home loans instead of vehicle finance has increased. “The lower interest rate has improved affordability, and BetterBond has seen a sustained surge in bond application volume since June 2020,” Coetzee said.
While having transportation is important, there are ways South Africans can make room in their budgets to be able to afford both.
“Instead of getting a vehicle loan, save up so you can afford to buy the vehicle for cash or at least finance a small fraction of its value,” he advised.
Alternatively, for those who live near their office and local grocery stores, Goslett recommended selling the car and using transportation apps like Uber instead. After the first few months of the tough lockdown, Goslett sold his own vehicle to save unnecessary costs. “Our office has been working remotely since March, which means I only go to the office once or twice a week. When I have to travel, I use driving apps. At the end of the month, that cost is still less than the cost I paid for auto insurance, services, gasoline, and monthly repayments for the vehicle. “
As tempting as it is to buy an expensive vehicle, Goslett encouraged South Africans to think about their future prosperity rather than focus on their immediate satisfaction.
“Investing in real estate first, you may have the opportunity to afford expensive cars later in life when the property has grown in value that can make a decent profit on selling it. However, if you buy an expensive car first, you may find it difficult to get a home loan later – especially if you have defaulted on vehicle repayments and this has affected your creditworthiness, ”he warned.
Those who are unsure about the benefits of owning a home can consult a local real estate expert to learn more about what they can get from investing in real estate. Alternatively, you can schedule a consultation with a bond originator like BetterBond to learn more about home finance options.