If you’ve been saving up a decent sum of money with the intention of using that money to build your own home, make sure you have enough capital saved up before commencing with the building. If your credit rating isn’t very good or you would prefer to avoid the 20-year dependence on a home loan and the interest charged by the banks, saving up may be the answer, but once again – make sure it’s enough: this is to say that the cash needed to build a house is a substantial amount, and that your can’t expect to have money left over for luxuries, pet supplies and those little expenses we all like to spend on.
Running out of time
What often happens with people who choose to self-fund the building of their own homes is that they severely underestimate the amount of money it’s going to cost and the amount of time it’s going to take. Even if you have the right amount of money, if something goes wrong with your contractor or the builders you’ve selected, the process of finding adequate alternative dispute resolution can consume a lot of the time you may have allocated for building your new home. In that instance, money would have to be spent on your existing accommodations or rental, and potential legal or dispute resolution fees.
Running out of money
If you end up underestimating the amount of money it should have taken to build your own home, you have one of two options – either take the time to save up more money, or opt to take out a bank loan or a personal loan. Taking out an expensive personal loan can be very risky, especially because of high interest, and needs to very carefully be weighed up as a viable option. A R120 000 personal loan paid back over five years will end up costing you more than double the loan amount.
Loan repayment vs Investment options
If you are forced to take out a high-end loan, you may be wondering whether it’s worthwhile to try and pay it off sooner, or whether you should invest any money you have left over at month-end instead. According to the New Credit Act, you will not be penalised for paying off a loan sooner than the allotted number of months – you may actually be rewarded with a good credit standing. In terms of investing any extra money versus paying off debt, it just depends on what interest you’re being charged. Personal loans and credit cards are usually charged a very high interest rate, anywhere between 14% and 22%. If you had to invest that money, you would be lucky to make 10% interest on your capital investment, so according to this example, it would be far better to pay off your debt quicker.
To ensure that you are not forced to go into debt because of a lack of planning, if you decide to build your new home out of your own pocket, a good rule of thumb would be to multiply your estimation by two and add another 10% for unforeseen costs. If you do need to take out a loan or go into debt to cover costs, be wise about which finance vehicles you decide to use and consult with a financial advisor on your best course of action.