Here are the reasons not to become a second time buyer
Regardless of your reason for thinking of buying a second home, you need to do your homework thoroughly before taking this step. While owning a second property is a good building block for wealth for a family it is not without its pitfalls.
Second time home buyers are generally motivated by one of two reasons: The need for more space for a growing family or the desire to generate a passive income from a buy-to-let investment.
Tommy Nel, head of credit at FNB Home Loans shares the three most common scenarios you are likely to find yourself in when deciding to become a second time buyer: You are planning to buy on the condition that you first sell your existing house, you still owe your current bond and require a further loan or your bond is paid up and you are applying for a new home loan.
Considering these three scenarios these are the factors that could turn your wealth creation dreams into a financial setback.
Servicing two bonds
When buying a second home, banks will perform a new credit and affordability assessment that meets the requirements of the National Credit Act (NCA). This will be based on your credit track record, household budget and ability to afford the minimum monthly repayments.
Managing your own household expenses and property related expenses on a second property, whilst repaying two loans may potentially leave you overextended, increasing the likelihood of not being able to keep up with your financial commitments as they fall due.
It is therefore important to know what you are letting yourself in for and perform the appropriate research in this regard:
- Factor in costs such as insurance, municipal rates and taxes, levies, property maintenance and repairs.
- Managing agents typically charge anything between 8-10% for managing a property.
- It could be risky to assume you will have 100% occupation on a continuous basis.
- The rental price needs to be competitive with other properties in the area. You cannot simply just take your bond installment, add other costs and expect to let your property for that amount. The market often dictates what you can charge.
Conditional offer, subject to the sale of your existing property
This clause stipulates that a purchaser who makes an offer on a house must be given enough time to first sell their existing home.
“However, in tough economic times many sellers are not willing to give up their option to accept offers from other buyers by waiting for one individual to first sell their home,” says Nel.
Moreover, there’s no guarantee that you will sell your home for its current market value. This could result in selling your property for less than its market value, unless you are patient and don’t get carried away with your desire not to lose the property you are trying to acquire.
Paying up the first bond
This may not be a good idea from a tax perspective as you would be unlikely to claim your interest deductions against rental income. Instead, it could be more beneficial to use some of the equity in your primary residence to get the best possible rate on your investment property by putting down a sizable deposit.
Regardless of the scenario you find yourself in, it is evident that you will need to do careful analysis of your unique situation before deciding to become a second time home buyer.