Jonathan asks: I recently got married, and my wife is building a small business to run from home, which does require a lot of space.
I am currently spending around R4 500 a month on rent which is a very good deal for a largish home and I save R5 000 a month.
I am interested in getting into the property market, but I am hesitant to purchase a home at this point, seeing as a equivalent home would cost me about R1,5-million.
Maya replies: This is an excellent question because the answer is not always clear cut.
I am facing exactly the same dilemma renting in Cape Town at the moment, so I’ve been looking at the figures. It does seem that you can rent for far less in Cape Town than buying would cost you. I suspect this is because house prices are so high yet lower salaries do not allow landlords to charge high rents such as in Johannesburg.
Saving for a deposit
Your current rent sounds fantastic. To put it in perspective, to buy the house with a 10% deposit your repayments would be about R11 300.
The risk however is that the lease is not renewed and you do not find a similar property at such a good monthly cost.
What you could do in the meantime is take the difference between the mortgage repayment and rent (R6 800), or as close as you can afford, and save that as a deposit on a home. That way if your rent agreement is not renewed you are in a strong financial position to consider buying a home.
Considering what you spend on rent and what you have left each month after your bills and savings, you would qualify for a mortgage of R1-million.
But given your current situation it makes sense to keep renting.
Rent vs interest
In your case the rent is out of sync with the property value. As a rule, the cost to rent is usually about 6% of the value of the property. So a R1,5-million home would have a rental of R7 500 compared to the mortgage repayment of R11 300.
However remember that a portion of your mortgage is repaying your home so you are building up an asset.
Therefore I prefer to compare rental costs only to the interest portion of the mortgage because effectively interest is the rent you are paying to the bank (this is how it is calculated in Sharia law).
Based on an interest rate of 8% (prime, less 1%), your interest payments would be R9 000. If your rent had a 6% escalation, then within three years your rent would equal your interest payments. At 10%, you reach that within two years.
However, interest rates are at a low point and there is a risk that they will increase. Currently you would get a fixed rate of 10%.
If you use that as your interest repayment projection then your interest would be R11 250. At this rate rent will match your interest within seven years at a 6% escalation and within five years at a 10% escalation.
So as a general principle, one could argue that if you are planning on renting for more than five or seven years, you would be better off buying a property.
If you have a large deposit, then the figures weigh more in favour of buying than renting.
Small business tax benefits:
Also remember that your wife’s business can claim a tax deduction on the space used in the house by up to 20%. This can apply to the full rental amount or the interest only portion of a mortgage. She should speak to an accountant in this regard.
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