How a deposit affects your home loan

When buying a home, not only will you need to save for roughly a 10% deposit on the asking price, but you will also need to budget for the various ad hoc expenses that come with purchasing property, including registration fees and transfer duties. With the costs of purchasing a home being as expensive as it is, it is understandable to want to forgo the deposit. Before you do, take a moment to consider how a deposit will affect your home loan...

A deposit helps you save on interest charges
While it can be challenging to save up enough to cover all the costs of buying a home, remember that you will be paying off the home loan for 20 or even 30 years - the accumulated interest on this can amount to hundreds of thousands of Rands. By reducing the lending amount by paying a deposit, you will end up saving a substantial amount in interest charges over the course of their loan term.

To illustrate the point, BetterBond, provides the following example: On a R1 million bond at a prime of 7% with a 10% deposit of R100,000, buyers pay R7,000 per month, which amounts to R1,674,646 over 20 years. But, those who do not put down a deposit will pay R7,750 per month, which totals R1,860,717 over 20 years. By paying a 10% deposit, buyers save R750 per month and R86,071 on the loan (if you deduct the R100,000 paid for the deposit).

BetterBond also reports that the interest rate the bank is prepared to offer will be more competitive when buyers put down a deposit, so buyers stand to make even further savings in this regard.

A deposit increases your chances for bond approval
South Africa's leading bond originator, BetterBond reports that only two out of ten customers apply for 90% LTV, while six out of ten customers are requesting a 100% LTV. While it is possible to take out a 100% home loan, not only will putting down a deposit reduce your monthly instalments and increase your bargaining power when it comes to negotiating the interest rate charged on the home loan, but it will also improve your chance for bond approval. BetterBond reports an approval of around 67% in the 100% LTV applications. They report that the approval ratio is 4% better when buyers put down a 10% deposit, and this approval ratio gets better as the deposit amount increases.

Final thoughts
While saving for a deposit is never easy, it will make it more affordable to pay off a lifelong asset that will offer financial security well into a buyer's retirement. At that point, those years of discipline and sacrifice it took to save up for the deposit will look like time well-spent when considering the long-term financial security and return on investment this decision has to offer. Those who are searching for property should get in touch with their nearest RE/MAX Agent to find out what property costs in their area and how much they will need to save to afford both the deposit as well as the associated costs of buying a home.