There are many factors to consider before making a smart real estate purchase. Photo: Getty Images/Gallo Images
I want to buy a house for the first time, but I’m worried about the high interest rates. I’m trying to determine if it’s the right time to buy. I have a similar situation regarding a car.
My current one has high mileage and needs to be replaced, but of course I can’t do both at the same time as banks look unfavorably on someone applying for a bond while in car debt. How should I handle this?
REPLY FROM THE CITY PRESS:
The good news is that interest rates are at a high and are not expected to rise significantly from here, so you shouldn’t expect an interest rate shock. However, you need to make sure you do your affordability calculations correctly.
Buying a home is a big commitment and you need to make sure your finances can handle additional costs. Ideally, you should have a 10% down payment plus an additional 8% to cover all transaction costs associated with buying a home. That means you should aim to have saved 15% to 20% of the purchase price.
Be sure to also consider the ongoing costs of owning a home. There are rates, utilities, maintenance and insurance to pay for on top of the mortgage payments.
If your car needs to be replaced at short notice, it can put a significant financial strain on a new homeowner.
One strategy might be to replace your car first, but get a very affordable model. Remember that the amount you spend on the car has a material impact on your affordability to buy a home. A house is a much better investment than a car; the latter is amortized the moment you start driving it.
If possible, try to pay off the car in 36 months. This means that in three years you will have paid off the car and the money you used to pay off the car would be available as money for your new home.
It will also show the bank that you have financial discipline, which could improve the interest rate you qualify for.
The bottom line is that you need to have a plan. Don’t rush into debt until you’ve analyzed the numbers and seen how the debt would affect your monthly living expenses.
READ: Personal finance: Does it make sense to use my bond to pay for my car?
Wondering how much life insurance you really need to be adequately covered for you and your family? You are not alone, so please heed this advice to our letter writer, Kelly:
Do you have any advice on how to determine how much life insurance I need?
I have spoken to several insurance company advisors and they have all given me a different amount. I just want to have adequate coverage – not be overinsured or underinsured. I am in my twenties, married out of community of property with accrual, and my only dependent is my husband. I have no assets (only my job).
FINANCIAL PLANNER TERENCE TOBIN OF RICH IDEAS ANSWERS:
As you mentioned, you are in your twenties and married with no children, and I assume you have no debts. Your most valuable asset is your ability to earn an income.
Most of us have the potential to earn millions of rand in our lifetime, so we need to protect that wealth. Should something happen to us that physically prevents us from working, at least we know we won’t suffer financially.
You should use an independent financial planner to ideally help you determine the exact amount of cover based on your specific needs. However, here is a rule of thumb that can help you:
I use the word “life” in life insurance as an acronym to determine how much lump sum life insurance you need. This stands for loans, income, burial, education. This also works very well in the field of disability coverage, lump sum benefits and income replacement benefits.
. Loans: First, we must ensure that all debts (loans) are settled at the time of death. At this point, include all short-term and long-term debts, debts to family, debts to the SA Revenue Service (such as estate taxes), and other death-related expenses.
Income: As said before, this is your most valuable asset and should be protected no matter how old you are. If you are unable to earn or generate your income (whether through a salary, commission, or part-time job), you and your family will still have expenses to pay. One would need an income to cover those expenses. Therefore, we need to calculate the replacement income that you and/or your family will need if you are unable to pay it due to illness, injury, disability or death. Living expenses still need to be paid.
Factoring in inflation and investment terms are also key to this calculation. You may also have a debt that you want to pay off because of an illness or injury, and a disability lump sum payment is extremely helpful to pay that off to perhaps make lifestyle changes such as buying medical devices, installing wheelchair ramps or other support. AIDS.
READ: Personal Finance – Where Should I Invest My Short Term Money?
Funeral: We also need to pay for funeral and deathbed costs so that we can be remembered with love and dignity and so that our families don’t incur great expenses to bury us. Think of the ceremony, the coffin, related funeral services and perhaps an “after tears” party. This can be part of your death cover or a separate funeral product. Education: While you may not have children yet, you need to increase your life coverage to take care of your children. One way to do this is to include “future coverage” in your current life coverage policy. This means you can increase your life coverage at a later stage without insuring.
When deciding how much insurance to provide for your children, consider the cost of their education as well as starting capital. Life starter funds are where you use life insurance as a way to pass on some generational wealth that will help them start their lives.
This could be a car, maybe a down payment on a house or even a contribution towards their wedding one day. Here you can choose to have the death cover paid out as monthly income by the insurer instead of a lump sum. This has a number of advantages.
Consider having different life insurance and disability coverage on your policy to cover each of these needs.
They have different raise requirements and investment terms, and you also want to make sure that the premium cartridges you select are durable and suitable for your individual needs.
For example, if you have children, the coverage only needs to be there until they reach a certain age.
READ: How to finance your solar panels
A good financial planner considers all of the above, as well as what you can afford and your ability to meet other financial goals, such as retirement.