Buy a starter home or your forever home?
As more and more properties enter the market and inventory grows, first-time buyers have more options available to them than they did in last few years. With market conditions tipping in buyers favour, it may have many asking whether they should purchase a starter home now or wait until they can afford to buy their forever home.
According to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, the definition of what constitutes a starter home will differ from one person to the next. “When some people think about a starter home they may have a fixer-upper in mind, however this is not necessarily the case. One person’s starter home might be exactly what another person is looking for in a forever home. Generally speaking a starter home is a property that will suit your needs for approximately the next five years or until your circumstances change, whereas a forever home is a property that you can see yourself living in indefinitely or at least for the next 20 to 30 years. It is the home that meets all the criteria of your dream home - the right location, the right size and all the features you would ever want or need,” says Goslett.
Essentially the decision to buy a starter home now or wait will be determined by a number of aspects, such as affordability and buyers individual needs. While all buyers would rather opt to purchase their dream home straight away, the large majority of first-time buyers are not in a financial position to do so. Home prices and debt levels have continued to rise over the years, while salaries have barely budged. A few decades ago one income purchased a respectable home, however in today’s market two professional incomes still may not be enough to comfortably afford a home in some of the more expensive areas.
Another factor is that there are advantages of starting out with a more manageable property and upgrading at a later stage, such as being able to build up equity. “Once a buyer is in the property market it is generally easier for them to build from there, as they have an appreciating asset that they can sell to help them upgrade. They also have the option of keeping their starter home as an investment property and renting it out to get a passive income,” says Goslett.
He adds that while purchasing property should be viewed as a long-term decision, there might be features that buyers want but don’t necessarily need at the moment, such as an extra bedroom or large garden. It would make sense to rather save money and compromise on unnecessary features that can severely impact the price of a home. The lower bond repayment and less expensive upkeep will allow the buyer to save money for their future forever home.
Goslett notes that many first-time buyers are young couples and executives who are in the early stages of their careers, so buying a starter home may give them a chance to build up their income and affordability ratios to be able to afford a higher bond repayment and bigger property when their current home no longer meets their requirements. “Living in a starter home will also give the buyer a chance to assess what features they want in their dream home and what they don’t, as well as get a handle on the different responsibilities and expenses that accompany homeownership,” he says.
If buyers decide to wait for their forever home, ideally they should rent a property that is reasonably-priced so that they can build up as much savings as possible to put down a sizeable deposit. The larger deposit they are able to put down the better, as this will reduce the monthly bond repayment. According to Goslett an advantage of waiting is avoiding the chance of being stuck with a property in a bad time to sell and being unable to move up. A disadvantage of waiting is home prices will continue to increase, so something that is not affordable now might be potentially less affordable in the future. “Buyers will be hoping to earn more in the next few years, plus they will have some savings, but they aren’t making more land. The population continues to grow, while the available property and land remains the same. Consistent demand for property will always result in property prices following an upward trajectory over time,” says Goslett. “Even though real estate is cyclical and will have its ups and down, it will be harder to purchase your dream home without first getting into the market.”
Goslett offers some advice to first-time buyers who want to fast-track their forever home purchase:
Start where you can and build up
The first property bought may not be your dream home, but it’s a foot in the door.
Have extra money saved for expenses
Buyers should have around 5% of the value of the home saved for other expenses, such as maintenance or renovations.
Pay more to reduce the bond term
An additional payment of just R300 on the monthly bond repayment, can reduce a 20 year bond of R500 000 by almost four years. This will also reduce the amount of interest paid over the term of the bond.
Prepare for the unexpected
Prepare financially for possible future scenarios such as an interest rate increase or any other scenario that could financially threaten future plans.
“Buyers can still enjoy the benefits of owning their own home and having their foot in the door without over-committing themselves financially and compromising their financial well-being in the future,” Goslett concludes.
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