Smaller deposit? Buy a cheaper home

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?

“Many buyers are taking the view that they should take advantage of the current lending conditions and secure a home loan with whatever deposit they have, rather than wait to save more and risk stricter lending conditions, higher home prices or interest rates starting to rise again,” says Rudi Botha, chief executive of bond originator BetterBond.

“This is reflected in our latest statistics, which show a sharp drop in the average deposit being paid by SA home buyers from 22.5% of the purchase price to 19.75% over the past 12 months, and a concomitant increase in the percentage of home loan applications approved, from 75% to 80%.”

There is some sense of urgency to get into the market, he says, 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.

“However, we believe the best choice if you are 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 of doing this, Botha says, will be that:

  • You will need a smaller home loan.
  • Your minimum monthly bond repayment will be lower and you will need less disposable income to cover it.
  • The monthly household income you need to qualify for the loan will be lower.
  • You will have a better chance of qualifying for an interest rate concession on your bond that could save you many thousands of rands on the total cost of your home over 20 years.

“In addition, you may even be able to pay an additional amount off your bond each month and pay your home off early.”

On a R1 million home loan, he notes, 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 are then able to pay an additional R500 a month off your bond, you will pay off your home in just over 17 years instead of 20 and save a further R195 000 in the process.