My Money

Olebile Khupe | Monday June 7, 2010 00:00

The recent credit crunch has forced many lenders to review the maximum amount they are willing to lend, especially in mortgages, where 100 percent financing has now become a thing of the past.

Most lenders have now become more strict, requiring the borrower to contribute a higher deposit towards the purchase of property.

In Botswana, this has been perpetuated by house prices which have skyrocketed in the recent few years, which now means that 10, 20 or 30 percent down payment required from you works out to be a sizeable amount of money.

The amount of money a lender can advance you is worked out as a percentage of the value of the house, and is often referred to as the 'loan to value' (LTV), and will vary from institution to institution, depending on their credit policies. The additional amount that the borrower then needs to contribute depends on where the cost of the property is relative to the market value.

A price lower than the market value means the lender may advance a larger share towards the purchase of the property. As an example, if you are buying a house for BWP 400,000, with a market value of BWP 500,000, a lender who finances 80 percent of market value could be prepared to lend BWP 400,000.

Since the lender is granted the right to hold the purchased property as security against the advanced amounts, they use this cushion to improve their chances of recovering their money if the house were to be sold under stressed conditions, or if house prices were to come down.

It is also important to remember that contributing a higher deposit also reduces your monthly repayments, since the amount borrowed will be lower, and may help you own your property within a shorter period of time.

Since most people will sell their property at market price, this creates challenges for first time homebuyers, who are often therefore often faced with the difficult task of raising the additional amount the bank is not financing.

It is therefore very vital that the necessary financial planning be thoroughly done before making that first step onto the housing ladder.

Here are a few tips on how to start planning for this major step in your life:

Seek professional adviceThe first check point is to calculate how much you qualify for, based on your income.

It is a good idea to first speak to a mortgage advisor who will then be able to help you work out how much you can afford to borrow and what your likely monthly repayments are.

You can also use a mortgage calculator to work out the size of mortgage you can afford.

Many financial websites offer free calculators which allow you to type in how much you earn, and work out the monthly payments your desired mortgage would cost you.

ResearchIt is imperative that buyers research the area in which they wish to buy. Looking at the sort of homes that are available and the prices that they are going for can help you work out how big a mortgage you are going to need and how long you will need to save up your deposit.

Start earlyIt sounds obvious, but it's true. If you can approach your mortgage deposit with several months (or, better yet, years) of savings behind you, you're going to be in a much stronger financial position, and many of the worries typically associated with scrimping and saving at the last minute could be greatly reduced.

Even if you cannot afford to save much each month, the sooner you start the better. One tip on how to start saving is to try and put aside what you would expect to have to pay on a mortgage.

That way the cash builds up and you get used to budgeting for when you do own a home.

You should also try and save in high interest savings to make the most of your money.

BudgetIf you budget and keep a record of everything you spend, you may find some glaringly obvious savings that could be made. For example, do you need to buy your lunch each day, or is that gym membership really necessary, can you hit the road instead?

Stop and thinkBefore you make any really big purchases, stop and think about whether you really need to spend that money, or if it could be put to better use as part of your mortgage deposit.

If you make yourself wait for at least a week before making a decision you will often find that it would have been a 'whim' buy.

Identify opportunities for cost-savingsLook for opportunities to access services at a lower cost, for example, mobile phone rates may be cheaper with one provider than another, or it may be cheaper to go on post-paid contract than pre-paid. Banks normally charge lower service fees for transaction done online, while also allowing you to view your balances anywhere as long as you have access to the internet. Do some research to find out if you could save money on your groceries, electricity, internet, phone, car insurance and so on--- it will pay off. Do not just settle for overpriced services--- switch!

Join forcesIf you are part of a couple, your joint savings will make it much easier to get a deposit together, but if you are single, it can be harder. So consider deriving a savings plan with your partner.

It will also raise the level of financial consciousness and help you both focus on common priorities. Saving for a mortgage deposit can be difficult, but with a little pre-planning and self-discipline, it can be done --- the key is to take that first step!

Olebile Makhupe is the Head of Global Markets at Standard Chartered Bank Botswana. For Feedback and contributions please e-mail--mymoney@mmegi.bw