Buying in your 20s

Thanks to the Reserve Bank, interest rates are still the lowest they've been in 50 years, bond repayments are less than rent in many areas, and all your friends are buying property - but as a young person you still have to be sure that homeownership is the right move for you.

So says Gerhard Kotzé, MD of the RealNet estate agency group, who notes that the Covid-19 pandemic has also largely removed two other things that have been obstacles to early homeownership in recent years: wanderlust and the need to relocate for work.

"The huge increase in corporate acceptance of remote working means that a great many young people no longer have to worry that they might need to move towns to stay employed, because as long as they have a good internet connection, they can do just that from their current homes.

On the other hand, opportunities to become a 'digital nomad' and travel the world with your work laptop in hand have been severely curtailed by the pandemic, and with international travel set to become much more expensive, are unlikely to be as widely attainable in the future as they have been in recent years.

Consequently, he says, the recent surge in first-time home buying among people in their 20s is not that surprising. "However, there is much more to it than just following a trend among your peers. As a young person, you need to think really carefully about your personal situation before making a commitment that could profoundly affect your future.

"For example, if you decide to save up for a 10% of 20% deposit so that you can keep your bond costs down when you buy your home, you need to think realistically about how long that might take and what other goals might be affected. Working from home, you will probably not find it a big sacrifice to give up take-aways or new shoes or fancy coffees. But what if you had been planning to pay for some study courses to improve your qualifications? Would you be prepared to put that goal on hold to save for a deposit instead?"

Alternatively, says Kotzé, you might decide to go ahead with a purchase with only a 5% deposit in hand - or even to accept one of the 100% loans currently on offer from the banks for those with good credit records. "But before you do, you need to assess the risks involved. Property values could decline and put you in a negative equity situation if you take a bond for 100% of the current purchase price. This type of bond also tends to come at a higher interest rate, meaning that your monthly repayment will be more. And you will definitely be in a more vulnerable position financially should interest rates go up again.

"It is usually better to keep your bond low and then use any spare cash you may have to pay it off as fast as possible to build up equity - even if this means buying a smaller or less expensive property as your first home. But if you have children, this might be problematic, especially if they need space for home schooling in addition to the space you need for a home office. You might find it suits you all better, right now, to rather rent a bigger home where you can all be comfortable."

In addition, he says, young people need to anticipate the total costs of homeownership and work out if they will be able to afford them without putting a strain on their finances every month. "First-time buyers are often surprised by how much it actually costs to run a home, especially if they have been renting and many of these costs have previously been carried by their landlords.

"On top of utility costs and your short-term insurance premium for the contents of your home, you now need to budget, at a minimum, for homeowners' insurance and bond insurance, for example, as well as property taxes, levies if you are living in a sectional title complex or estate, and any repairs and maintenance, as you will now be your own 'landlord'. Will you be able to afford all this comfortably, without feeling worried every month? There's no fun in homeownership if it makes you stressed.

Also, will you still be able to maintain your emergency and retirement savings? It's even more important to do this right now when the economy is shaky and the risk of sudden unemployment is higher, and when there are also increased health risks for everyone.

Kotzé also says that young people should not be driven by FOMO (fear of missing out), because interest rates are likely to stay low for at least the next two years, while home prices continue to rise very slowly. "This is a large investment that is going to have a long-term effect on your finances, so you shouldn't make it in a rush. Slow down to plan properly and buy when you're ready."