While more first-time buyers are entering the property market and banks are seeing a stronger demand for home finance, those applying for finance will still need to meet the tight credit requirements.
He says the sooner buyers start saving the better, because the larger the deposit they are able to put down, the more likely they are to obtain bond approval, given all other criteria have been met.
This is according to Adrian Goslett, CEO of RE/MAX of Southern Africa, who says this is the reason why those who are looking to enter the property market in the next five years should start saving for a deposit as soon as possible, if they haven’t already.
He says the sooner buyers start saving the better, because the larger the deposit they are able to put down, the more likely they are to obtain bond approval, given all other criteria have been met. The smaller the percentage of a deal that a bank has to finance, the less risk to them and the greater the chance of approval.
“It is very difficult for buyers to obtain 100% bonds these days and most property transactions require the buyer to have at least a 10% deposit, although in some cases as much as 30% could be required,” says Goslett.
Even if the deposit remains at the 10% mark, he says that is a deposit amount of R100 000 on a property that costs R1 million and coming up with this amount of cash at one time is a tall order for many would-be homeowners.
Aside from the fact that most buyers will need a deposit to secure finance, this is not the only reason for buyers to have money saved up before entering the market. Goslett says that even with a 100% bond, buyers will still require the additional funds for other costs related to purchasing a property, which include the transfer duties, attorney fees and moving costs, never mind rates and electricity account activations with council and the like.
Although a deposit benefits the bank in that they are at less risk when issuing finance, there are also many benefits for the homebuyer as well. One of which is that the larger the deposit, the less the total amount owed to the bank will be. This will reduce the monthly bond repayments as well as the interest paid over the term of the loan agreement. A reduced bond repayment also improves the buyer’s affordability score, which will allow them to apply for a higher bond amount than they would qualify for without a deposit.
As banks view homeowners with a deposit as a lower risk, some may offer to reduce the interest rate on the home loan. “Given the standard term of 20 years for a home loan, a reduction in the interest rate of only 1% can save the homeowner thousands. In fact, it is possible for the money saved to be far more than the initial deposit amount put down by the homeowner,” says Goslett.
South Africa scores very low on domestic savings when compared with the world’s other emerging markets, such as China and Malaysia. With a domestic savings rate at 52% of the national GDP, China is among the highest in the emerging markets, while South Africa has a domestic savings rate of approximately 20% of GDP.
It is never too late to start saving for the home of your dreams, however, buyers who have started saving from their first pay cheque will have the advantage of their money having earned interest over the longer term.
“Even the smallest amount saved each month can grow into a substantial investment over time and secure your financial future due to the wonder of compound interest.
Compound interest is the interest earned on interest, which grows your money exponentially faster the longer it is left to work, Goslett explains, and this is why it is so important to start saving as early as possible and keep it up.
“This could mean affording a higher value property and buying the house of your dreams sooner than expected.”