Using a deposit to secure a bond in a risky lending environment

Following the most recent interest rate hike announcement, prospective South African homebuyers are encountering another hurdle in their quest to purchase property. That is, the challenge of risk-averse banks taking a more cautious approach to lending due to the current economic climate.

“A riskier lending environment means that the banks have more reason to believe that a borrower may default on their loan, making them less likely to approve a home loan of a larger size, or at all,” explains Jackie Smith, Head of Buyers Trust, a safe and secure bank-hosted deposit solution for homebuyers and subsidiary of ooba Group. “We believe that this is why we’re seeing more homebuyer’s putting down deposits when applying for a loan.”

According to Smith, a deposit on a home loan can be used to 1) indicate your ability to save and cover future repayments and 2) make you less of a risk to lenders.

“The biggest factors contributing to South Africa’s riskier lending environment is centered around the current economic climate. The country is currently grappling with high levels of unemployment, reduced affordability due to high inflation, higher interest rates and reduced productivity as a result of ongoing loadshedding,” she adds.

Statistics reveal a more cautious attitude from the banks

“In the current environment, homebuyers need to take proactive steps to demonstrate their ability to repay their loans and practice smart financial planning, or risk having their application rejected,” says Smith.

This is imperative, as the latest statistics from ooba Home Loans via their quarterly oobarometer reveal that South Africa’s banks may be beginning to finally tighten their lending reins.

These statistics indicate that while the country’s average purchase price has grown slightly, the size of bonds granted has gotten smaller, with a year-on-year decrease of -0.3%. First-time buyers are feeling this caution from the banks the most, with their average approved bond size shrinking by -2.7% year-on-year.

The percentage of successful bond approvals from the banks has also decreased this quarter, now at 66.2% from 67.9% at the end of 2022.

“While these statistics shouldn’t be cause for alarm, as the majority of banks are continuing to actively compete for home loan business, they are a clear indicator that prospective buyers should take every step possible to demonstrate their trustworthiness and ability to repay – and putting down a deposit is one of the best ways to do this,” explains Smith.

South Africans are increasing their deposit size – here’s why

Luckily, many buyers seem to have taken this advice to heart, with the Q1 ’23 statistics revealing a year-on-year increase of 11.9% in the average size of deposits. “The average size of a deposit is 7.5% of the purchase price, but for the first-time buyer segment the average deposit is 9.7% of the purchase price, just a fraction away from the optimal 10%,” Smith says.

As the Head of Buyer’s Trust, Smith has significant insight into the importance of deposits and the numerous benefits they bring to buyers.

She shares her top five reasons why buyers should make their deposit a priority in a riskier lending environment:

  • Increased chance of securing financing on your desired terms. “The banks are more likely to approve your desired bond size at an attractive interest rate if you are asking for a smaller loan and are contributing to the purchase through putting down a deposit.”
  • Shows your commitment. “Putting down a deposit on a home indicates to both the banks and the seller that you are serious about following through on your commitment to the purchase, increasing the chances of both your offer and your home loan application being accepted.”
  • Greater protection against interest rate hikes. “Simply put, a deposit reduces the amount you need to borrow. This results in lower monthly repayments and the associated interest on the loan, making you less vulnerable to the interest rate cycle.”
  • Building equity. “Equity is the difference between the market value of the home and the amount you still owe on your home loan. The more equity you have, the more you own of the property, and the more flexibility you have in the future.”
  • Saving you money. “Apart from the obvious long-term cost benefits of lower monthly repayments and the prospect of a more attractive interest rate, deposits can also save you money in the short-term. Entrusting your deposit to a secure platform like Buyers Trust means that it will be placed in a maximum interest-bearing account, and this interest will be repaid to you as soon as the property transfer process is completed,” Smith concludes.


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