I can obtain a R1m bond from the bank; is it better to buy a fully bonded house for R900,000, or to buy land worth R300,000 and use the remaining R700,000 to build?
Dear reader,
In property investment or homeownership, financing decisions are pivotal. The choice between buying a fully bonded home or building raises several important considerations, which I set out below:
Interest rates and market cycles
First and foremost, interest rates play a significant role in any decision involving a bond. The interest rate you lock in today may not remain fixed, especially if you’re starting off in a low-interest-rate cycle. As interest rates fluctuate, so too will your monthly payments, potentially adding significant cost over time.
Understanding the current interest rate cycle and the projected future trends will provide insight into how your financial obligations might change.
Moreover, if you are taking out a bond, it’s crucial to consider the term of the loan. A longer repayment term might make monthly payments more affordable, but it could lead to paying more in interest over the life of the loan. On the other hand, a shorter repayment term may save you money in interest but increase your monthly payments.
Define your property plan: personal or investment
Equally important is defining the purpose of the property. Are you buying a home for personal use, or is this a strategic investment? If it’s for personal use, you’ll need to factor in how the property fits into your lifestyle, location preferences and long-term living plans. If it’s an investment property, however, the location, potential for capital appreciation, rental yield and overall market conditions should weigh heavily in your decision-making process.
For investment purposes, a detailed analysis of how the property will fit your overall portfolio is essential. What are your broader financial goals, and how does property acquisition align with them? This can help inform your decision on whether to buy an existing home or to construct a new property.
The case for buying a fully bonded house
When purchasing a fully bonded house, the process is generally more straightforward. The property is already built, and you can move in or rent it out immediately.
Pros:
- Immediate availability: A fully bonded home is ready to be occupied or rented, offering immediate returns, particularly in a rental or resale market.
- Lower risk of unforeseen costs: When buying an existing property, the cost is typically fixed, and you’ll have a clearer idea of the necessary maintenance and renovation work, if any.
- Market value: A well-located home in a desirable area may offer greater potential for appreciation over time, especially if the market is on an upward trend.
Cons:
- Premium pricing: An existing property may come with a premium price, reflecting its location and condition. There is limited flexibility to adjust costs unless you undertake renovations.
- Less customisation: Unlike building your own home, a pre-existing home may not meet all of your specific needs or preferences. Customisation could be an option, but it may be costly.
The case for buying land and building a home
Alternatively, obtaining a loan for R1m and using the funds to purchase land and build a home could offer more flexibility, though it comes with its own set of risks and challenges.
Pros:
- Customisation and personalisation: Building your own home allows for complete control over the design, layout and materials used. This can result in a home tailored exactly to your preferences and requirements.
- Potential for higher return on investment (ROI): If you can manage the build effectively, constructing a home on affordable land can yield a better ROI, especially if the market is favourable for new constructions.
- Land appreciation: Over time, land itself may appreciate in value, potentially increasing the overall worth of your property in the long run.
Cons:
- Construction risks: As many homeowners can attest, building a home often ends up being more expensive and time-consuming than originally anticipated. Unforeseen costs, delays and changes in material or labour costs can significantly increase the overall expenditure.
- Building delays: Construction projects often take longer than planned, and this can lead to missed opportunities, such as waiting for a rental income or for a sale.
- Ongoing oversight required: Unlike purchasing an existing home, building a property requires much more involvement in terms of project management. You’ll need to engage with contractors, suppliers and possibly deal with building regulations and permits, which can be both time-consuming and stressful.
In essence, whether it’s better to buy or build will depend on your budget, resources and risk tolerance. If you have access to sufficient resources or can secure additional funding for unforeseen construction costs, building could be a viable option, particularly if you’re looking to create a home that meets your unique specifications.
However, if you have a more conservative approach to investment and are looking for a more predictable return, purchasing an already bonded home might be the safer and more efficient choice.
Additionally, consider whether the property aligns with your long-term financial goals. Taking on a new debt commitment should be carefully weighed against other priorities, including securing adequate retirement savings and ensuring a balanced investment strategy.
Ultimately, both options have their merits and drawbacks. The right choice will depend on your financial situation, the specific property you are interested in, your long-term plans and your risk appetite. In any case, it is essential to do thorough research, create a detailed budget, and consider engaging with financial advisers, property experts and construction professionals to guide you through this process.
As with any major financial commitment, obtaining in-depth advice before taking on additional debt or making a large investment is always advisable.
Elke Brink is a wealth adviser with R21 Wealth Management.
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