The realities of buying a home

We all need a place to live, which means we’re either paying rent or paying off a bond. Although popular wisdom says that buying a home is always better than renting it – because you’re then paying off someone else’s bond – it’s not always as simple as that. We often buy homes aspirationally, so it’s tempting to take out the largest bond value we can pay for, without considering the longer-term impact on our financial portfolio.

Structuring your loan in ways that consider your holistic financial situation – so that your home is just one element in your basket of investments – will give you the diversity you need for a well-rounded wealth portfolio. This approach, sometimes referred to as structured property finance, allows you to balance affordability with broader financial goals.

Paying off a bond vs investing for growth

Home loans are among the most significant debts we’ll ever take on. While the general advice is to prioritise paying down debts as quickly as possible to avoid paying unnecessary interest, this has some nuance. For instance, paying off a bond early can save you substantial interest over the loan term, but it might also limit your ability to invest in other growth opportunities. Unlike credit cards, home loans are productive debts, giving us a place to stay and, we hope, growing in value over time depending on the property market. Investing vs paying off debt requires careful consideration of your financial priorities.

Home loan interest rates are also significantly lower than other types of debt because the repayment term is longer, and the physical property is linked to the home loan as collateral. But making our homes our single most significant investment carries a lot of concentration risk, because if you only pay down debt, you miss out on financial diversification of earning compound interest on your investments over time.

And if you think with the end in mind, while you want to reach retirement debt-free, you also need an appropriate investment portfolio to draw a monthly income from, to get you through the next few decades.

Practically, this means balancing the desire for the home you aspire to own with the benefits of having enough disposable monthly income to invest in other growth opportunities like a tax-free savings account, unit trusts and retirement annuities. You need a place to live, but you also need the financial breathing room to grow your wealth holistically.

The hidden costs of buying a home

If you’re planning to use your property as an investment, it’s essential to think about the end-to-end costs of owning a home beyond just the loan repayment. Besides once-off costs like the deposit, transfer duties and legal fees, you are also liable for property taxes, homeowners’ insurance and regular repair and maintenance costs. These expenses make up the hidden costs of buying a home, which can significantly impact your financial plans.

Making a good profit on a property also means timing the market correctly, and if you get that right, you need to consider the impact of capital gains tax (CGT) on property too. While your primary residence is excluded from CGT, any profit over R2 million is taxable. Navigating capital gains tax on property in South Africa can make a significant difference to your long-term returns.

The importance of home loan protection

Because home loans are long-term debts, financially protecting yourself (and your loved ones) against uncertainty is foundational, especially while the loan is outstanding. Suppose you’ve taken on a joint bond where your affordability is based on two salaries. In that case, mortgage protection will ensure the outstanding home loan balance is settled if one spouse passes away. Under the right policy, this settlement is also triggered in cases of permanent disability.

Life cover does not replace mortgage protection, as these policies have distinct purposes. Mortgage protection is insurance for settling the home loan (i.e. debt), whereas life cover should provide your family with an income to protect the estate and fund things like your children's education.

The more efficient mortgage protection solutions also track your outstanding home loan, ensuring you only pay for the cover you need and save you in premiums over time.

By conflating these two policies, families are often forced to use a substantial portion of their life cover payment to either settle the bond or continue meeting their bond repayment obligations (which may not be affordable over time). This creates challenges. Winding up an estate tends to be a lengthy exercise, during which certain bank accounts are frozen and liquidity becomes difficult. It’s not uncommon for surviving spouses to lose the family home during this process to sell off assets quickly to generate cash, all of which works against wealth creation and preservation.

Finally, if you have group life insurance benefits with your company, you must ask under what conditions they pay out. If you cannot work temporarily due to an illness or disability, having the financial support to take time off work and ensure your monthly bond repayment can still be covered gives you the space to recover. You also need to understand whether these benefits fall away if you change employers in the future. While some group policies allow you to retain them in your personal capacity when you leave, check whether there are additional underwriting requirements when you leave the business.

Although our homes can be investments if property values appreciate and you sell at the right time, they are better thought of as places to share life with the people you love and a legacy to leave them when you’re no longer around.  When you approach it with this mindset, you’re freer to buy the house you can reasonably afford with enough income left over each month to diversify your wealth and meet your financial goals.

1. Based on my monthly income and expenses, and considering all the costs of homeownership, what’s a comfortable home loan value that frees me to invest productively in other areas, too?

2. If I have group benefits with my company, what events will trigger a payout and under what conditions?

3. If my home loan is paid off already, should I buy a second property to rent out, or are there better opportunities in the unit trusts, retirement annuities and other investments where I am not subject to capital gains tax?

4. Have I ensured that my mortgage protection policy is separate from my life policy so that if I pass away my family will have home-loan settlement and financial support for the future?