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Struggling to pay your home loan? Don’t just jump into selling, you may lose even more

Posted by Provided by Independent Media on October 20, 2023
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Homeowners under financial pressure and struggling to keep up with their bond repayments may believe that the best, and possibly only, option is to sell – but this could be a mistake.

Of course, each situation is different and so general advice may not be applicable to everyone, but if you sell your property too soon after buying it, you could lose more than you think.

Deciding when to sell a house you have bought depends on a few key considerations, says Brendan Michie, director at Hammond Pole Attorneys.

“Firstly, market conditions matter. If the property market is down, selling at a good price might be difficult. Secondly, your financial situation is a critical factor; selling at a loss may lead to a shortfall owing to your bank, especially if you’ve taken a large mortgage.”

Your personal circumstances also play a role, and selling due to a specific need might necessitate a quicker sale. Generally speaking though, the longer you can hold onto your house after buying, the better for your financial health.

“More time lets you build more equity – the difference between how much you owe on your mortgage and the home’s value – and take advantage of potential home value growth, while ensuring you can cover the costs associated with the sale of property.”

When is it too soon to sell my home?

Although this can be a tough question to answer, Michie says it may be too soon to sell in these specific situations:

  • If you have only paid a small deposit and you still owe a large amount on the bond
  • If you have made significant improvements to the house, but have not had time to recoup this investment
  • If you have to sell the house at a loss, and you will not be able to cover your costs
  • If you are selling the house for a specific reason, such as to move closer to work, and you are not sure if you will be able to find a suitable replacement property.

While selling a home is often the last resort for cash-strapped homeowners, Grant Smee, managing director of Only Realty, says some may now find themselves struggling to cover their monthly repayments and looking to cut their losses. But don’t be hasty, he warns.

“Selling your home might seem like the most obvious route to an easy payday, but you must first do the math to make sure that it pays off. Timing is important – if your neighbourhood currently has an excess of similarly-priced homes on the market, you might find it difficult to secure a buyer.”

Will I make a profit on my home?

First and foremost, those who put down a deposit and worked to pay down their bond over the years will have a higher chance of turning a profit. Therefore, some simple math should be done to deduce whether the time is right to sell your home.

“Important to note is that this equation doesn’t take into account the market value of the property or inflation. You need to weigh up the purchase price of the property versus the expenses incurred during the time of property ownership,” he says.

Expenses such as transfer duties and conveyancing fees (at the time of purchase), bond costs, rates and taxes, interest paid on the home loan over the load period, home renovations, repairs, levies, special levies and additional security should all be factored in.

“Also bear in mind that you will need to account for the agent’s commission which is generally anywhere between 3 and 5% of the sale,” he says.

“If you rented out the property, then you can off-set these expenses against the rental income received. If the property is your home, then you would need to consider what you would have paid in rental fees over this period. For instance, if you had spent R15 000 on rent over a five-year period then you would off-set R900,000.”

Smee says the final figure is known as the break-even value.

“This is the price that you need to sell your home at in order to break even. Anything over and above is profit.”

What if my loss will be too great?

If, after your calculations, you are still far from breaking even, he urges you to consider one of the following alternative avenues:

1. Rent out your property and consider a more affordable residence if this is a workable option until the bond has been paid down and the market is on the up.

2. If you have extra accommodation on your property such as a cottage, converted garage or flatlet, spruce these up and rent them out for extra income.

3. Cut back on unnecessary expenditure to ensure that you can repay your bond each month.

“Making the effort to budget and cut out certain luxuries should always be your first step when struggling with affordability – you might be in a more stable financial situation than you’d originally thought.”

In a case where you find that you regularly have some extra cash left over at the end of the month, it’s strongly advised that you increase your monthly home loan repayment so that you can pay off your bond quicker.

“Property is a great investment, but you lose money if you’re forced to sell, so consider the previously listed options before selling as a last resort.”

Practical advice: what to do before you sell

To sell your house successfully, Michie says there are some basic steps you can follow:

1. Understand why you’re selling and set a realistic price based on expert advice

2. Know your target audience and hire the right estate agent

3. Study the current property market and demand in your area. Consider factors like location, condition, and price that affect the sale

4. Learn about the selling process and stay informed

5. Make sure your legal and financial affairs are in order and seek advice if necessary.

He adds: “Don’t forget to consider the time of year, the economy, and mortgage options available to potential buyers. Paying attention to these details will increase your chances of selling your house at a good time for a good price.”

IOL Business

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