In a hurry to buy? A smaller deposit could mean smaller savings in the long-term

Is there any point in waiting to save up a large deposit on a home when interest rates are declining, and the banks are in a hurry to grant more home loans? This new sense of urgency is not what it seems.

Many buyers feel they should take advantage of the current lenient lending conditions and secure a home loan with whatever deposit they have. There’s a perception that waiting to save more could mean the risk of stricter lending conditions, higher home prices, or escalating interest rates.

Says BetterBond CEO Carl Coetzee, “We have seen a sharp drop in the average deposit being paid by SA homebuyers over the past 12 months, and a corresponding increase in home loan approvals. The sense of urgency, it seems, is because prices are only rising at about 3% a year at this stage but are expected to pick up momentum towards the end of the year, especially if interest rates continue to move downward and economic activity picks up — something we’d all love to see!”

But that urgency could be the undoing of over-hasty homebuyers. In our experience, the best choice, if you’re in a hurry to become a homeowner, is to use whatever cash you have saved up to pay a bigger percentage deposit on a less expensive property — not a smaller percentage deposit on a higher-priced property.

The advantages?

• You’ll need a smaller home loan
• Your minimum monthly bond repayment will be lower, and you’ll need less disposable income to cover it
• The monthly household income you need to qualify for the loan will thus also be lower
• You may even be able to pay an additional amount off your bond each month and pay your home off that much earlier!
• You’ll have a better chance of qualifying for an interest rate concession on your bond, which could save you thousands of rands on the total cost of your home over 20 years

On a R1 million home loan, an interest rate concession of just 0.5% will reduce the total cost of your home over 20 years by almost R80 000. And if you’re then able to put in an additional R500 a month, you’ll pay off your home in just over 17 years, instead of 20 — and save a further R195 000 in the process!

Whether you’re buying in haste or at leisure, it’s always a good idea to use a reputable bond originator like BetterBond. You’ll improve your chances of approval, and, with banks competing to offer you the best deal, you’ll be enjoying those savings at leisure.