Should you buy a car or house first?
The question has often been asked: is it better to buy a property or a car first? And no, it’s not a multiple choice or trick question… there is no correct answer to this question, each individual situation should be decided on its own merits. If you’re deciding between a GTi & excavator, you will love this: why bank's love gti's & hate excavators
Making financial decisions is probably the most difficult part of adulting. We so often preach being pragmatic and practical on decisions involving money but the truth is, big ticket purchases are often very emotional. Most people will have to decide do I get a car or a house at some point. The answer may not always be clear cut BUT there is a technically more appropriate way of approaching this age-old conundrum based on how bank credit teams assess risk and leverage. Listen up boys and girls, the things your banker won’t tell you about.
Banks fund transactions based on the risk associated with the clients 'affordability of the asset to be financed, the ability of the client to make repayments timeously based on available cash and the value of the asset coupled with what the bank can recover should the client not be able to make payments. All of this is based on historical financial information at the bank's disposal (your credit score). Banks are, after all, lenders and not venture capitalists or parents that can buy you a football team (can we actually call it football in South Africa or is it the ‘lesser cousin’ – soccer) for the fun of it. Here’s a great thread on how bank funding structures impact your overall payments: hustle your dream house for cheaper
So here’s the technical bit, when banks look at funding any loan, they consider all the existing exposure (loans taken out by that client i.e. car loans, credit card debt, unsecured lending, store cards etc) compared to the income of the client. They also consider the monthly total repayments and how much disposable income the client has after making these. This is in addition to the regular credit checks, such as whether or not repayments are made regularly on time and in full. This gives the bank an indication of the client’s ability to make repayments on a ‘new’ loan. This is why you probably wonder why your credit application has been rejected for a small loan but was approved for a large loan just a few months before. Banks look at the entire picture.
If you buy a car right before you purchase a house (especially considering the cost of cars in South Africa – you need to sell a kidney to afford one), you are likely to throw out your overall total leverage (the amount of debt you owe) compared to your income. This makes the bank’s consideration for your funding application of a house difficult.
To add a spanner into the works, when buying a car not only is your affordability impacted, banks also consider a car a risky asset class - it reduces quickly in value (damn depreciation!) compared to houses which are considered safer as they appreciate with value over time.
A bank is therefore likely to look at your credit record and decline your home loan application if you purchase a car first & have very little cash left at the end of the month. Worth remembering the period of a home loan – a bank has to double sure you’re good to pay for the next 20 years. It’s another reason getting any type of asset funding as an entrepreneur becomes so tricky. Cash flow certainty is important to financial institutions.
Therefore, even if there is no correct answer – whichever you decide to buy first will likely impact your second decision. Buying a car first won’t prevent you from being financed for a home loan BUT buying a car first when you are looking to purchase a house within a relatively short period of time will work against you and make it slightly if not infinitely more difficult (even increasing the interest rate you eventually get).
Considering that buying a house will be the single largest purchase for most people, it may be more prudent to go with that first to improve your chances and ensure that your credit record is in the best possible shape. Here’s a thread on buying your first home: considerations for buying your first property
In short banks will consider your:
- debt to income ratio, you want to keep this as low as possible just before buying a new – stay away from making unnecessary debt;
- payment history, ensure that you pay all your debts on time; and
- length of credit history, it’s a marathon, be consistent and keep a clean credit record as much as possible.
All of the above will help you get funding easier and at better rates.
Finally, qualifying doesn’t mean affordability!! Always consider the true cost of ownership. In buying a property these include rates, levies, utilities, security, insurance, maintenance – even the costs to furnish a brand new place can really damage your bank account! Those Weylandts L shaped couches don’t come cheap! In buying a car, it means maintenance, insurance, wear & tear and of course fuel! These costs rack up and can be silent killers.
Whenever I’m looking at purchasing a property, a trick I use is to take the base amount and multiply it by 1.3 or 1.4 (30% - 40% increase), if I’m able to afford that cash flow each month, I feel comfortable. If not – I’m in trouble.
For example: if the bond payments are 10k, it's worth making sure you have at least 13k-14k on hand each month at the minimum.
Whatever you decide to purchase, stay clear from excavators & you’re in a good space!
And, no Betway is never a better option.