Home ownership and vehicle ownership is often a point of debate in many circles. What’s the best investment avenue?
With public transport being as unreliable as it is, many South Africans choose to purchase their own vehicle. Rather than opting for an affordable option, many choose to take on vehicle finance to afford the purchase. As one of the most expensive forms of debt a person could have, this can inevitably delay one’s ability to afford to take out a home loan.
“The mindsets of many South Africans need to change from investing in assets that appreciate as opposed to investing in assets that depreciate. It is better to invest in assets that have steady and stable growth over a medium to long term, even if these do not reflect a significant percentage growth month-on-month or year-on-year; and, to be honest, you don’t get much better than a home in that regard,” says Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
“I would not recommend spending your hard-earned savings on something that devalues immediately as you drive it off the lot. Instead, I would take that same amount of money, whether that’s R400,000 or whatever it is, and use some or even all of it towards a deposit and get your foot in the door for homeownership,” he recommends.
Carl Coetzee, CEO of BetterBond, agrees that, with a prime lending rate at a current low of 7%, now is the ideal time to apply for a bond for that dream home. “Buying a home is a long-term investment in an asset that can yield considerable capital growth over time.” Home ownership is also an important step towards financial freedom, adds Coetzee, as it offers a form of forced savings that can be used in the future to buy a better home, or for other purposes.
Often the interest accrued on a car repayment is higher than for a bond repayment, although the term for a bond is usually much longer. A R700 000 bond repayment at 7% requires a monthly instalment of R5 400 over 20 years. A car payment for the same value, and also at 7% interest, is R14 000 over five years. “While it will take longer to repay the bond, there is the advantage of having a roof over your head and an asset that appreciates, making a bond the better choice,” says Coetzee. “The bond is almost a third of the monthly payment of a vehicle and is a much better investment option as cars are typically a depreciating asset.”
Furthermore, with more people spending time at home for work, due to the pandemic, there’s been increased interest in home loans instead of vehicle finance. “The lower interest rate has improved affordability, and BetterBond has seen a sustained increase in bond application volumes since June 2020,” says Coetzee.
While having a means of transport is important, there are ways South Africans can make room in their budgets to afford both. “Instead of taking out vehicle finance, save up so that you can afford to purchase the vehicle in cash, or at least only finance a small portion of its value,” he advises.
Alternatively, for those who live nearby their office and local grocery stores, Goslett recommends selling the car and using transport apps like Uber instead. Following the initial months of hard lockdown, Goslett sold his own vehicle to cut down on unnecessary expenses. “Our office has continued to work remotely since March, which means that I only go into the office maybe once or twice a week. When I need to travel, I make use of driving apps. At the end of the month, these costs still amount to less than what I was paying on car insurance, services, petrol, and the monthly repayments on the vehicle.”
As tempting as it is to purchase an expensive vehicle, Goslett encourages South Africans to consider their future wealth instead of focusing on their immediate satisfaction. “Investing in real estate first might allow you the opportunity to afford expensive cars later in life once the property has appreciated enough in value that you stand to make a decent profit when you sell. However, if you purchase an expensive car first, you may find it difficult to afford a home loan later – especially if you’ve defaulted on the vehicle repayments and tarnished your credit score as a result,” he warns.
Those who are unsure of the benefits of homeownership can consult a local real estate expert to find out more about what they stand to gain by investing in real estate. Alternatively, arrange for a consultation with a bond originator such as BetterBond to find out more about the options around home finance.