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A Fin24 user wants to know what to do with a R250 000 windfall. He writes:
I have come into some money - about R250 000. I don't own any property and I rent. I do have a vehicle financed at Wesbank.
I want to finally buy my own home, but am not sure how to go about it.
Should I use the money to settle my car, and then use what I was spending on the car payments towards the bond payments?
Or should I use the money as a big deposit on the home and just continue with the car payments till they are finished?
Monde Motha, channel manager at FNB home loans, responds:
It is difficult to give the best advice on your situation with the information available, but there are a couple of points to consider.
When paying off debt, it is beneficial to settle the debt with the highest interest rate first.
Usually, this starts with a credit card (which typically attracts very high interest), followed by vehicle finance and finally a home loan (typically the lowest interest rate loan).
This principle in its simplest form would suggest that it is better to settle the vehicle loan first (at a higher interest rate) and pay the lower interest rate loan (home loan) off over a longer period.
However, in order to qualify for a home loan, the bank may require you to put down a deposit of between 10% and 20%.
Even if it is not required, it is recommended to put down as big a deposit as possible, which in turn allows the bank to further reduce their risk and your interest rate.
If you settle the vehicle loan first you may not be able to meet these requirements.
Therefore, I recommend that you find the correct property first. You can apply for the home loan and meet the deposit requirements before settling your vehicle loan.
Remember that you need to consider the increased monthly payments of owning your own property (usually more expensive than renting) including levies/rates and taxes.
You need to ensure that you can afford your monthly commitments before making any big decisions. It is important that you do not commit yourself beyond your means and struggle to meet the monthly repayments.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
I have come into some money - about R250 000. I don't own any property and I rent. I do have a vehicle financed at Wesbank.
I want to finally buy my own home, but am not sure how to go about it.
Should I use the money to settle my car, and then use what I was spending on the car payments towards the bond payments?
Or should I use the money as a big deposit on the home and just continue with the car payments till they are finished?
Monde Motha, channel manager at FNB home loans, responds:
It is difficult to give the best advice on your situation with the information available, but there are a couple of points to consider.
When paying off debt, it is beneficial to settle the debt with the highest interest rate first.
Usually, this starts with a credit card (which typically attracts very high interest), followed by vehicle finance and finally a home loan (typically the lowest interest rate loan).
This principle in its simplest form would suggest that it is better to settle the vehicle loan first (at a higher interest rate) and pay the lower interest rate loan (home loan) off over a longer period.
However, in order to qualify for a home loan, the bank may require you to put down a deposit of between 10% and 20%.
Even if it is not required, it is recommended to put down as big a deposit as possible, which in turn allows the bank to further reduce their risk and your interest rate.
If you settle the vehicle loan first you may not be able to meet these requirements.
Therefore, I recommend that you find the correct property first. You can apply for the home loan and meet the deposit requirements before settling your vehicle loan.
Remember that you need to consider the increased monthly payments of owning your own property (usually more expensive than renting) including levies/rates and taxes.
You need to ensure that you can afford your monthly commitments before making any big decisions. It is important that you do not commit yourself beyond your means and struggle to meet the monthly repayments.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.
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