One hears a lot about home ownership being the key to personal wealth creation, especially from those selling property to first-time buyers, but the details of just how that works are often sketchy. “However, the process is really quite simple,” says Rudi Botha, CEO of BetterBond, SA’s biggest bond originator, “although it always demands discipline and can sometimes involve sacrifice.”
The key to becoming a real estate mogul, he says, is to understand what equity is and how to get more of it. “Quite simply, equity is the percentage of your home’s value that you own, or the difference between what a buyer would pay for your property and how much you still owe the bank.
“In other words, it is the amount you would be able to realise in hard cash if you were to sell your home today. When that amount is not very large, you are what is known as ‘house-rich and cash-poor’ and will only be able to increase your wealth if you start looking at ways to increase your equity.”
When you first purchase a home, for example, your equity will generally be equal to whatever deposit you paid. So a quick way to increase your equity is to pay a bigger deposit – or buy a less expensive home, says Botha.
“With household budgets currently under such pressure, it is difficult for most people to save up a large amount of cash to put down as a deposit. But it takes the same amount of money to pay a 10% deposit on a home costing R800 000 as a 13% deposit on a home costing R600 000 – and you will immediately have more equity, or what ultra-wealthy investor Warren Buffet calls ‘skin in the game’.
“In addition, your willingness to compromise and buy the cheaper property could well be rewarded by your lender with a lower interest rate on your bond – especially if you apply through a reputable originator like BetterBond* - and that could help you build up equity even faster. If your budget enables you to afford a monthly bond repayment of R7000, for example, but the monthly bond repayment for the cheaper home is only R5000, it is really worth paying that extra R2000 a month off your bond anyway – because it will enable you to achieve 100% equity within 10 years.
“In other words, you will have paid off your bond completely and will not owe anything at all to the bank if you sell it. And assuming the capital value of the property has increased by then, you will have quite a lot more wealth that you started out with, which you can then use as a very substantial deposit on a new home while you repeat the wealth creation process.”
Alternatively, he says, you could split your cash and buy two properties – one to live in and one to rent out – and carry on increasing your personal wealth that way.
“Either way, building up equity should be your main goal, and there are several other ways to do this too, starting with putting your spare cash, annual bonus and any tax you may get back from SARS into your bond account. This may mean giving up on holidays or a new car for a few years (that’s where the sacrifice comes in), but it will be worth it when you sell you home and you get to keep most of the profit instead of having to pay it to the bank.
“In addition, you can make home improvements that will increase the value of your home at the same time as you are doing your utmost to pay off your bond. The most popular include a complete repaint, an additional bathroom, a kitchen upgrade, added security measures and “green” equipment like solar geysers, but you should seek the advice of an experienced local agent to ensure that the cost of these improvements will generate the added value you hope for.”
*BetterBond uses a multiple lender application process to ensure that clients obtain the very best interest rates available. Currently the average variation between the best and worst rate offered on an application is 0,5%, which could translate into very significant savings for the borrower, at no cost for the service. On the average first-time buyers’ loan of R760 000, for example, the potential savings amount to more than R60 000 worth of interest over the 20-year lifetime of the loan, plus some R3000 a year off the monthly home loan instalments.
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