Saving up a deposit for your first property brings great financial rewards. The earlier you start saving, the better, but even if you missed the opportunity to start young, it is never too late, says Adrian Goslett, chief executive of RE/MAX of Southern Africa.
Over the last couple of years, the banks’ lending criteria have become increasingly stringent, and in particular, deposit requirements have remained high. Some banks have adopted policies of only awarding bonds at a 70% loan to value. That means a deposit of R300 000 required on the purchase of a R1 million property, a steep requirement for most prospective home owners. More recently banks have changed these policies and have become more competitive.
“However, the difficulty in obtaining a 100% bond is not the only reason why it is imperative to save up a deposit for a property purchase,” says Goslett. “Even if you do obtain a 100% bond, you will still need additional funds to cover the many other costs related to buying a property, such as the transfer duties and numerous fees that add up to significant amounts.”
Beyond this, however, there are substantial financial benefits to be realised over the longer term, if you can put down a deposit. The bigger the deposit you can afford, the less money you have to borrow from the bank at high interest rates, and the less interest you will have to pay the bank over the next 20 years.
Also, home owners who contribute from their own pockets to finance property are considered a lower risk to the bank, which means the bank can offer lower interest rates on their home loans. Even a 1% reduction in the interest rate on your home loan will save thousands of rands over the term of the bond. These savings, in many cases, add up to far more than the deposit amount.
A deposit will also ensure that the monthly repayments on the home loan are lower, which improves your credit score and allows you to apply for a higher bond amount than you could if you had no deposit.
So when should you start saving for your first property? From the day you receive your first salary cheque. The sooner you start the better and the reason for this is compound interest. You will earn interest on interest already earned, and the snowball effect compound interest creates in exponentially growing even small investments, given time, is truly a wonder, says Goslett.
For example, if you save just R100 a month over 40 years with a 10% escalation, you will accumulate more than R2 million. If you save R1 000 a month – 10 times more – over 20 years – half the time – with the same 10% escalation, you will accumulate less: just over R1,5-million.
“This is the power of compound interest – growing your money exponentially faster the longer it is allowed to work. Young people have a massive opportunity to build wealth, because they have more time to allow coumpound interest to work for them. It is unfortunate that so few young people realise the power they hold in their hands to secure their financial future, by saving even the smallest amount every month, and allowing compound interest to work for them,” says Goslett.
The sooner you start saving, the bigger the deposit you will be able to bring to the table when negotiating a home loan, and the more you will benefit financially from the savings in the interest payable over the life of the bond, the lower interest rate you can obtain, and the more expensive property you can afford.
“However, even if you missed the opportunity to start saving when you received your first salary cheque, it is never too late to start. Start saving right now, and don’t let another month go by in which compound interest could have been working for you,” says Goslett.
