In defence of deposits…

Homebuyers may be complaining now about having to save up deposits of 10% or even 20%, but they’ll probably be glad they did after next year, when interest rates and home loan repayments may well increase.

“The strong rand is helping to keep inflation and interest rates down at the moment,” says Harcourts Africa CEO Richard Gray, “but this situation could change within a few months, and at that stage those who kept their bond repayments down by paying a deposit will be pleased they did.”

In addition, he says, homebuyers need to consider the fact that the costs of running a home are rising all the time – with electricity charges, for example, set for another huge hike next year. “As unpopular as it is, and as difficult as it sounds, saving up for a deposit, rather than financing 100% of your home purchase, could be a budget lifesaver in future.”

Ideally, he says, homebuyers should try to have a full 20% of the home’s price available as a deposit. “With the national average home price now above R800 000, this is obviously a lot of money. However, those whose determination to save wavers should keep the likely benefits in mind – and especially the fact that they will be putting themselves in a very strong position to negotiate a below-prime interest rate.

“This is because lenders will consider a loan of only 80% of the purchase price to have a low risk factor, because there is already a sizeable sum available to help cover the loss if you default on your loan repayments. At the same time, lenders have found that homebuyers that put down a full 20% are much less likely anyway to default on their loans.

“And a lower interest rate on your loan will not only make your monthly repayments more affordable, but add up to great savings over the course of the loan. For example, if you buy a home for R800 000, and put 20% (or R160 000) down, then you will only need a R640 000 loan. At prime of 9,5% you would pay R792 000 in interest over the entire term of the loan. If you got the same terms but financed the whole R800 000, you would end up paying R970 000 in interest.

“If you then factor in a better interest rate on an 80% loan, of say 8,75%, the saving would be even greater, since your total interest repayment would only be around R717 000.”

Another benefit of putting down a sizeable deposit, Gray says, is that you will have “instant equity” in your home. “If you have to sell in just a few years, whether for a planned move or because of an unexpected emergency, that equity might well save you from having to sell at a loss. And in an emergency, it may well be possible to access some of that equity as cash, instead of having to take out a personal loan or apply for an overdraft.”

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