The impact of a Budget on a homeowner

In this current turbulent economy, creating and sticking to a personal budget is a fundamental step towards really managing your money effectively and avoiding debt. This requires time and discipline – you will need to honestly examine your income, spending habits, and debts, and make some key decisions about how you will spend your money going forward.

The word budget might bring on negative feelings in some; they associate it with restrictions and a lot of hassles. “With a budget, you can begin to prioritize your spending and better manage your money and financial future. Instead of viewing a budget as a negative, view it as a tool for achieving your financial goals, and a step closer to owning your new home or even a second home” says Craig Hutchison, CEO Engel & Völkers Southern Africa.

You may perhaps feel like you do not have any funds to budget with, and that each rand already has its allocation. However, keeping a budget might highlight areas where you would never have suspected an over spend. Budgeting is simply the process of creating a plan of how and where to spend your money that you receive, by balancing your expenses with your income.

Benefits of having a budget and sticking to it

A budget is there to enable you to get a hold on your spending and save where you can, and it will also keep you out of debt or help you work your way out of debt.

It gives you control: If you feel like you are not in control of your money and you are constantly wondering where it went and what happened to it, budgeting can put you in control. When you budget wisely and understand where your money is going, you will feel more in control and at ease with your financial situation.

Puts the brakes on spending what you don’t have:  It forces you to work with the money you have – you'll know exactly how much is coming in this month, how much you need to spend and save and how much you have left over. It will discourage you from relying on credit cards to make unnecessary purchases and end up with major debt problems.

Work towards your dreams: It teaches you to save first and to decide what to save for. This will help you to map out your life goals and you can focus your money on the things that are most important to you. You will find it easier to turn down impulse buys and to put your money where you really need it. This may be getting out of debt, saving up for a home or working on starting your own business.

Prepare for emergencies: An emergency fund should cover 3 – 6 months of your living expenses so that you can survive until you are back on your feet. Don’t try to save this fund all at once. Rather, build a payment plan into your budget and start growing the fund as soon as possible.

Keeps your credit score healthy: 35% of your credit score is based on your payment history, while 30% is based on your debt-to-credit ratio. By paying your bills on time and paying down your debt, you'll boost your credit score considerably, which means that you'll have an easier time qualifying for loans with lower interest rates when you need them.

Tips for starting a budget

1. Gather every financial statement you can. This includes bank statements, investment accounts, recent utility bills, and any information regarding a source of income or expense.
   
2. Record all of your sources of income. If you are self-employed or have any outside sources of income, be sure to record these as well.
   
3. Create a list of monthly expenses. Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes a mortgage payment, car payments, auto insurance, groceries, utilities and entertainment - essentially everything you spend money on.
   
4. Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month. Variable expenses are the type that will change from month to month.
   
5. Total your monthly income and monthly expenses. If your end result shows more income than expenses, you are off to a good start. This means you can prioritize this excess to areas of your budget or pay more on credit card balances to eliminate that debt faster. If you are showing a higher expense column than income, it means some changes will have to be made.
   
6. Make adjustments to expenses. If you have accurately identified and listed all of your expenses, the ultimate goal would be to have your income and expense columns to be equal. This means all of your income is accounted for and budgeted for a specific expense or savings goal. If you are in a situation where expenses are higher than income, you should look at your variable expenses to find areas to cut. Since these expenses are typically non-essential, it should be easy to shave a few Rands in a few areas to bring you closer to your income.
   
7. Review your budget monthly.  After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.
   

Budgeting to buy a home

A good budget plan begins one or two years before the buyer makes an offer. Having a monthly budget has more advantages than simply making sure you have enough in the bank to cover your bills - it can also help you determine how much house you can afford.

Here are four tips for renters who plan to become homeowners:

• Build strong credit and raise your credit score - The most important focus for all potential buyers should be improving their credit score. A low score can prevent someone from buying a home or at least from qualifying for an affordable mortgage rate. To improve credit scores, buyers should pay off past-due bills, pay every bill on time and reduce their balances to less than 30% of the credit limit on every account. It is best to have three to five credit accounts, such as a car loan, student loan or credit card, for one year or longer.
• Reduce debt - while buyers increase their savings, they should also reduce their debt. Paying off debt tops saving in terms of priorities because of the interest payments on the debt, which exceeds the amount of interest they can earn on their savings. Lenders want to see that you are managing your debt and keeping your credit card balances low.
• Practice making house payments - future homebuyers are encouraged to make “virtual” mortgage payments as a way to build up savings and learn to budget for actual mortgage payments down the road.

Keep an eye on DTI - debt-to-income ratios are an important element in a loan approval. This ratio compares minimum monthly payments on all debt to gross monthly income. If your debt-to-income ratio is over 50%, you need to pay off your debt before even thinking of buying a home.

What should you budget for?

Hollard lists some of the major expenses, to help you prepare for the other costs associated with your new dream home:

1. Deposit

Banks typically require a 10% deposit on the purchase price of your home, but this can be as much as 30% depending on your credit rating. If you are in the market to buy, you’ll need to have a deposit in hard cash. It is paid upfront and once-off to the transferring attorneys.   

2. Initiation fee

This fee is charged by the bank at the start of the loan (if you take out a bond).  It can be paid upfront and as a once-off fee, or capitalised to your loan amount.

3. Transfer duty

After your deposit, the transfer duty is one of the biggest upfront and once-off costs to consider when buying a property. Transfer duty is a tax levied by the government and no property can be transferred to a new owner if this is not paid. The only time transfer duty is not payable in a normal sale of property is when you are buying from a registered VAT vendor (developers as an example), in which case VAT is included in the price. The higher the value of the property you buy, the higher the percentage of duty payable. Property transactions below R900 000 are exempt from transfer duty.

Tip: See SARS website for transfer duty rates based on property price categories.

4. Transfer costs

Transfer cost is the professional fee that the conveyancing or transferring attorney charges in a property transaction to register your ownership of the property with the Deeds Office, protecting your legal title to the property. This is paid once-off before registration and is not to be confused with transfer duty.

5. Bond registration costs

For the bank to make sure that they have some form of security over the property you have taken a loan on, they will register a mortgage bond that confers certain rights on them. This bond is registered at the same time as the transfer of the property and is done by the bond registration attorney, an attorney on the bank’s panel. Similar to transfer costs, this attorney will also charge his professional fee for registering the bond, which the buyer has to pay. 

6. Occupational rent

This is a fee that is payable only if you take occupation of the property before the transfer of the property into your name has been registered. The rate is usually stipulated in your Offer to Purchase.

7. Moving costs

Shop around for the best rates and service, and remember that typically month-end is busiest and more expensive. Some removal companies offer special pricing during off-peak times, so don’t be afraid to ask.

8. Protect your finances with a Home Warranty 

Research shows that most defaults on home loans occur within the first 18 months from when the loan is taken, because this is likely to be the time you’re most financially stretched and can least afford costs associated with hidden defects. Hollards Home Warranty addresses the issues around defects, with a professional property inspection that is coupled with an insurance policy. This protects you as the buyer against the financial ramifications of any hidden defects that may emerge in the property for two years after taking transfer.  The cost of the warranty is covered by the seller – all you have to do is ask for it in your Offer to Purchase. 

9. Homeowners and life insurance 

The bank will require protection to ensure that the value of their security on your loan, the house, remains intact. To achieve this, the bank will require that you take out two types of insurance which need to stay in place for as long as you have the loan with the bank.  The first is homeowners’ insurance which protects the bricks and mortar of the property against an insured peril such as fire, flood and so on. The second is life cover which in the event of the death of the property owner or bond holder, the insurance will settle the outstanding bond amount so that your family is not lumbered with the debt you owe to the bank.  In both instances, you have the option to take this insurance through the offering via your bond provider, or through your current preferred broker or insurer. It is often worth comparing and shopping around to see where you get the best offer. Where you do not use the bank’s offering you will need to provide proof of external insurance.  

10. Contents insurance 

Although not obligatory, it’s highly recommended that you insure the contents of your home against loss or damage as a result of theft or burglary and other perils such as fire, flood and extreme weather conditions.  This insurance is often combined with homeowners insurance, and if you have car insurance, with one insurer, this usually results in a much cheaper combined premium.  

11. Rates and taxes

Once the transfer is completed, you will need to register for rates and taxes as well as your water and electricity services. The municipality will require a deposit - the amount varies from municipality to municipality and is linked to the municipal value of the home.

12. Total cost of ownership

Owning a home comes with on-going costs such as electricity, water and refuse removal (on your municipal account), garden and cleaning services, maintenance, painting and so on, which all need to be budgeted for.   

If you need help, there are various tools to help you get started on the road to financial freedom, and if you are planning on buying a property a real estate agent might be one of your best. They can precisely give you the breakdown of what you need and eliminate any hidden costs along the road which could cause your new home bliss to quickly turn into a nightmare. Prevention is always better than cure.