Pros and cons of investing in property
JAMES FERN | Monday April 4, 2022 08:18
Onkemetse wants to buy her house today, but she does not have the same patience that her mother had, and doesn’t have the land where she wants to live. She can’t save and build step by step. Should Onkemetse apply for a mortgage loan?
Is buying property a good debt?
When we buy a property, we must first make sure we are able to afford the repayments. The repayments should take the place of paying rent in our monthly planned budget. If you can afford the repayments, it is far wiser to be paying for the house you live in (through a mortgage), than paying for someone else’s mortgage, in the form of rent.
Property Loans known as mortgages are considered a long term loan. They are not designed to be paid off quickly, but to take up to 25 years to repay.
The interest rates charged on this type of loan are linked to the prime interest rate which is guided by the Bank of Botswana. Mortgages are given through banks and societies, who are governed strictly by law, so the borrower can be sure that this type of loan is legitimate. The interest charged on a mortgage is quoted at an annual interest rate, and is usually reasonably low compared to other types of debt.
In a way, having a mortgage is like having a long term savings plan. Provided the value of the property increases above inflation over time, when you have paid off your mortgage, your property will be of a higher value than what you have paid for it.
Can I borrow the full amount?
Lenders should not give 100% of the loan. If you want to buy a house with a mortgage, you must first prove to the bank that you are able to afford it. They will ask you to pay a deposit, usually between 10 to 20%. So the first thing that you will need to do is open a savings account, investment or money-market fund and grow your deposit.
So what are the downfalls of having a mortgage?
The reason why the bank gives property loans at lower interest rates is because they secure the loan with your property. What this means is: if you don’t make your repayments on time, they can take your house away from you. The bank will then sell the house to cover their costs. This can happen, even if you have been paying your repayments on time for the last 17 years, and only have three years left to go. Their costs would include the outstanding loan and interest, plus legal fees, so you don’t want this to happen.
Remember: if you don’t make your payments on time, you may lose your house and your investment.
Another concern when we buy property is what happens to our investment if there is a fall in property prices. When this happens, the value of our property could be less than what we owe on it. This is called ‘negative equity’.
If you are living in the house, that’s fine – your mortgage payments are similar to the rent that others pay every month.
However, if you’ve borrowed to buy an ‘investment property’, and the rent you are receiving doesn’t cover the mortgage, it is no longer an asset, but a liability. If the property prices do not recover, you still have to keep paying.
There is no way of knowing how the property prices are going to perform overtime, and past performance is no indication of future performances.
What can stop me from owning my own home?
A bank won’t lend to you if you have a bad credit rating. Your credit history is a record of how you handle credit and repay your debts.
If you take out a loan and don’t make the payments, or if you run up debts on your credit card, or if you buy on store credit and don’t pay each month, you will have a bad credit rating.
So, even if you aren’t ready to buy your own home yet, it is important not to get into debt, and to pay your debts off on time if you have some.
*James Fern, SCI Wealth (Pty) Ltd. SCI Wealth are Botswana Licensed Investment Advisers based at Kgale 129, Finance Park