There are those that say that buying a property is like being born. Painful and confusing to begin with, but very worthwhile in the long term.

Buying a property and taking out a bond to finance the purchase is a long term commitment. Anyone who doesn’t look upon this way will be making a mistake, and a costly one at that. Statistics show that people who buy a property and sell it within the first five years of ownership lose money. Even if they have made an actual profit on the sale.

The reason for this anomaly is that the costs associated with buying a property and especially of taking out a bond or home loan are high. Owning a property is for the long term, and the short terms cost can be very high. Both directly and indirectly. The actual costs of taking out a bond in relation to the total costs involved in the act of buying a property are not that high.

There are a total of five different bond related charges that will be incurred every time that you buy a property, from conveyancing fees, registration fees, Value Added Tax as well as the initiation fee to apply for a bond.

These fees need to be covered, although they should represent no more than 3% of the total cost of the property when it was purchased. If the property appreciates in value as it should, this cost will be recovered with in the first year or so.

What many people are unaware of is that when they take out a long term bond, for at least the first third of the bond’s duration, they are paying back mostly interest and very little of the principal. In simple terms, if they have borrowed one million rand over twenty years at 7% annual interest, they will find themselves with a monthly payment commitment of 10,000 rand.

This means that if they sell their house after five years, they will have only paid of 30,000 rand out of total bond repayments of 600,000 rand, the balance of 570,000 representing interest. Not a great return on investment in anyone’s terms. The only way that a home owner should consider selling a property within the first five years of ownership is that they stand to make such a considerable profit on it that it justifies the short term loss.

At any time during the bond’s duration they borrowers find themselves falling into arrears this can cause some considerable and unwelcome costs. Banks themselves borrow money from the central bank of South Africa to finance bonds, and are given no leeway whatsoever in meeting their financial commitments.

The major South African banks will look at every case individually when a borrower falls into arrears. Depending on the circumstance, the bank can decide to grant a period of “grace” where only the principal needs to be returned and not the interest, and in some exceptional cases the entire monthly payment may also be frozen to allow the borrower to pass through a crisis and get back on their feet. However banks, being banks, will need to recover their money, and will charge penalties that can be expensive.

To sum up the costs associated with a bond can be relatively low as long as the borrower takes a long term view of property ownership and is able to meet their commitments throughout the duration of the bond.