Steps to save and invest for a new home

Acquiring a first home for purposes such as, buy-to-live or as a long-term investment, in the right area, will bring in insurmountable returns both in quality of life and in monetary returns. This potential has piqued the interest of many millennials, who make up approximately 28.4 million South Africans.

A significant portion of this number will have a major impact on the property market, with many of them having one main question in mind, ie, what are the most effective ways to save up for a new home?

A prerequisite to saving-up for a new home is working-out the approximate amount that is required for you to save. You will need money saved for a deposit on the home, transfer costs, homeowners’ insurance and monthly bond repayments. To determine the home-loan amount you qualify for, you will need to speak to your bond lender.
 
Universally speaking, your monthly housing expense should not exceed 25-30 percent of your gross monthly income. So if you earn R25 000 a month, it is safe to allocate R7500 for your housing expense each month, which will include the above mentioned expenses.

In terms of a bond repayment, it can range from a few thousand Rands to 20% of the property price, depending on the seller and estate agent. Although, South African banks have shown a slight increase in granting 100 percent bonds.

Now that you have considered the above cost factors, it is time to start saving up for your new property.

Decide on a timeframe

If you are planning to buy a home four years down the line, and your approximate down payment is R100 000, you must be willing to save R25 000 per year, over four years or R2 083 per month. The best way to achieve such savings is to save/invest your money in the following ways:

Tax-free savings

Tax-free saving accounts were introduced in 2015 through government legislation. These accounts are ideal for long term savings, and allow you to save a maximum of R30 000 per year (500 000 in a lifetime) without paying an amount for tax on your capital gains and/or interest earned. Opening a tax-free savings account specifically for a down-payment on your new home means that you will not pay any tax on your capital gains, regardless how long you stay invested.

Avoid idle deposits

Saving up for a new home requires a big lump sum deposit, and the most hazardous way to slow down this process is an “idle deposit”. This is effectively money that an account holder leaves in their current account, earning a minimum or no interest. This money is then lent out as short-term loans by your banking institution, and results in the bank reaping a large amount through interest charged, which is even more unfortunate considering the low interest you are receiving for the amount.

Instead invest in a unit trusts namely, Money Market Funds, which offer yields in line with prevailing interest rates and are typically better than bank deposit rates. Placing savings towards a bond will see you earn higher returns than other call accounts or other immediate access deposit accounts.

Consider off-plan

One of the best ways to see your money go further is to buy-off plan properties as these do not require transfer costs. This is major saving considering just how large these costs are. For example, a property with a purchase price of R1250 001 to R1 750 000 will incur transfer duties of 6% plus a flat rate of R15 000. Even higher, a property between R1750 001 to R2 250 000 will incur a cost of 8% plus a flat rate of R45 000.

Off-plan properties in Cape Town are extremely popular and to make the most of such an opportunity, it is recommended you approach it pro-actively by getting in-touch with developers and placing your name on the waiting list for when a new development is launched.

Besides saving from the exclusion of transfer costs, there are added savings because buying off-plan only requires a small initial deposit (up to maximum 10% of the purchase price) to secure a deal as opposed to a big lump-sum. This means that you do not need to provide a big down-payment and money for bond repayments simultaneously. For those looking for property for investment purposes, off-plan purchases are ideal as you could sell at a profit before the development is complete.

Conclusion

Considering the various costs that accompany buying a new home, new-comers to the property market are encouraged to find effective ways to save up for the process. This will serve to help you grow your money faster so the dream becomes a reality sooner rather than later.