PAY MORE NOW, TO SAVE LATER
Buying a home is probably one of the most important – and expensive – purchases many people will make. It usually requires a long-term financial commitment in the form of a bond to cover the cost of the home. While most buyers have an idea of how much they can afford to pay each month towards their bond, few realise the importance of putting down a deposit when applying for finance.
According to Carl Coetzee, CEO of BetterBond, a deposit will make a significant difference when it comes to banks deciding whether to approve or decline a bond application. “BetterBond applies to multiple banks on the buyer’s behalf, to secure the most competitive lending rate. A deposit – even if just 10% – will go a long way to securing a better interest rate. Banks certainly look more favourably at an applicant who appears to be a lower lending risk, and paying a deposit suggests that the applicant is able to manage their money.” It also counts in a buyer’s favour when negotiating with a seller, says Coetzee. “Being able to put down a deposit signals intent. Sellers are more likely to consider an offer if they are dealing with a serious buyer.”
Being able to offer some form of deposit will also have an impact on the gross household income required to qualify for a bond. For a R2 million property, the gross monthly income required for a bond at the current prime lending rate of 7% is almost R52 000. By putting down a 10% deposit, the monthly gross income required for a bond on this property drops to around R47 000, and reduces the monthly bond repayments by just over R1 500.
With a favourable lending environment created by the historic-low interest rate during 2020, BetterBond reported an 8.9% increase in the size of approved bonds in December, year-to-date, while the average deposit as a percentage of the purchase price dropped by 9.6%.
For first-home buyers, the average approved bond amount increased by almost 10%, while the average deposit dropped by 13.5%. “Buyers are rushing to make the most of the low interest rate, as they can afford to buy 30% more than they could in January last year. However, by putting down a larger deposit, and paying off a bit more each month, they will be able to pay off their bond even earlier.”
“Astute potential homeowners will really interrogate their budgets to see where they can contribute towards saving up for a deposit, without compromising all other essential household expenses,” says Coetzee. Using BetterBond’s pre-approval service gives a potential buyer a good idea of their purchasing power, so that they know how much they can contribute towards the all-important deposit. “By contributing towards the deposit, a buyer will be able to save more over the long term and be in a better position to respond to interest rate hikes in the future,” concludes Coetzee.
The table below shows the potential savings when paying a 10% deposit on a R1 million home, with a prime lending rate of 7%, 8% and 9%.
|Purchase Price||Deposit||Size of loan||Interest rate example %||Monthly bond instalment||Monthly Saving when paying R100,000 deposit||Total bond amount||20 Year saving when paying R100,000 deposit|
|R1 000 000||R0||R1 000 000||9%||R8 997||R2 159 342|
|R1 000 000||R100 000||R900 000||9%||R8 098||R899||R1 943 408||R215 934|
|R1 000 000||R0||R1 000 000||8%||R8 364||R2 007 456|
|R1 000 000||R100 000||R900 000||8%||R7 528||R836||R1 806 711||R200 745|
|R1 000 000||R0||R1 000 000||7%||R7 753||R1 860 717|
|R1 000 000||R100 000||R900 000||7%||R6 978||R775||R1 674 646||R186 071|