Rules For Financial Success: Rule 5
Correspondent | Monday September 18, 2017 16:02
Rule 5: Own The House You Live In ASAP
At S.C.I. we’ve been going through a series of eight personal finance rules, designed and created for ordinary people to start them on the road to financial freedom and success. You can give one of our advisers a call on 3180111 or email advice@scifinancial.com if you’ve got any questions or comments.
Rule Five is about the importance of owning your own home and the best ways to go about getting it.
Importance Of Owning Your Own Home
We have all heard the question; “Why get a mortgage with a high interest rate, when you can just rent?”. The answer is that owning the house you live in is an excellent financial plan. Here’s Why:
l Your home is your family’s security. By buying your own house, you are able to put a roof over your family’s head. Even if you pass away, your children will still have a place to live that you left for them. If you are renting out a home, you cannot afford your family this security.
l Successful people consider a mortgage to buy a house to be a “good debt”. Investopedia defines good debt as “a debt that helps you generate income and increase your net worth.”
Mortgages easily fall into the good debt category, simply because, as much as the property market goes down and up in the short term, your home will eventually grow in value over time. This is called appreciation. “Bad debts” are the opposite of this, where you take on debt to purchase something that goes down in value and won’t provide a return on the investment – like a car.
l Thirdly, by buying your own home, you will be your own tenant – and you’ll take care of it! Instead of paying the rent, you’ll be making a mortgage contribution, and this will make your future self richer, not poorer.
l Lastly, you can gain control of your living space and increase your stability. You won’t have to deal with having to move from house to house. You are able to choose and create the kind of living environment you would like to have, and there is also a peace in knowing that you own the roof that is above your head.
Smart Tips For This Rule:
1. Aim to save 10% or 20% for a deposit
This is one of the hardest areas when it comes to buying a home, but it is also one of the most rewarding. By saving 10-20% of the loan amount before you get the loan, and putting that money as a deposit, you have significantly decreased your loan amount. You have also proven to the bank that you are disciplined when it comes to your savings, and are less likely to default on repayments.
2. Don’t Take Too Long A Mortgage.
One of the biggest mistakes people make with mortgages, is taking loans that last too long. On paper, taking out a long mortgage seems cheaper because you pay less per month, but this is not true. It is actually more expensive to take a long mortgage than a short one.
Plan. What can you afford? Don’t take a 30 year mortgage when you can afford 20, or even 15 years.
3. Live Within Your Means
“Live a lifestyle that you can afford.” People have tendencies to overspend and buy flashy cars and gadgets that they really don’t need. The same goes with the home. Many build large extravagant houses in the suburbs so that they can be praised in their social circles.
They take on too large a mortgage, and a few years into paying it off, they realise they can’t afford it, and their finances start to spiral out of control.
Do your research, be honest with yourself and remember that, even if you buy a house in an area that isn’t too expensive, you can still develop and improve it later - because it is yours.
4. Don’t Delay
Again, living within your means is important. Don’t wait to save up enough to buy a bigger house than you need. There will be other things you need to save for, like your children and your retirement.
When you are renting, aim to buy a house of a similar standard – say in five years’ time. Put a five year investment plan in place to afford the deposit! If you invest P2,000 per month for five years and get 10% annual growth, you’ll have P154,874 in five years time – enough to afford a good deposit.
Start NOW.
5. Life Insurance
It’s necessary to have life insurance in place when you take out a mortgage – this is to protect the bank if you die, but it means that if you do pass away early, your family have their debt paid and the house is safe. Banks can provide life insurance, but it might be very expensive. Speak to your insurance guy or your financial planner to get lower cost life cover.
6. Speak To A Financial Planner
This tip cannot be stressed enough. A proper financial planner will be able to help you save up for the deposit for the house and give you advice on the best ways to save.
They’ll also help you plan the process and make sure that you buy your home in the most cost effective way for you. Financial planners should be independent and unbiased.
Here at SCI, it is our responsibility to make your life easier.
©S.C.I. Group 2017. Author: Toyin Omotoye – Financial Adviser with the S.C.I. Group. S.C.I. Financial (Pty) Ltd. is a licensed Investment Adviser, giving financial planning and investment advice, financial education and debt counselling distress. For help and information contact 3180111 or advice@scifinancial.com