Weakening economic conditions, increased debt repayment burden, rising consumer inflation and stricter lending criteria have seen 100% bonds, especially to first-time buyers, become much harder to get, but it has also placed many potential buyers firmly between a rock and a hard place.
“Not only do banks require bigger deposits than before, it has also become more difficult to put money aside in today’s economic climate, as growing financial pressure is forcing consumers to tighten belts even further just to make ends meet,” says JP van der Bergh, founder of Propscan.
"However, a sizeable deposit has several significant benefits in addition to increasing your chance of bond approval - it also gives you a jumpstart on the financial process, makes your offer more appealing to sellers as it bumps up the chance of bond approval, naturally decreases your monthly bond repayments, and saves you a considerable amount in interest over the long term.”
Kay Geldenhuys from ooba, national mortgage originator, illustrates how a deposit can reduce the overall and monthly costs of buying property: “A home buyer who purchases a house for R1 million with no deposit at a 10.25% interest rate will pay approximately R9 816 per month over 20 years. At the end of the home loan term, the total amount repaid will be R2 355 944.
“On the other hand, with a R100 000 deposit, the monthly repayments will be approximately R8 835, and the total repayment will be around R2 120 350. Add the deposit to this and the total comes to R2 220 350 - making the total repayments some R135 594 cheaper than buying without a deposit.”
She says it also stands to reason that the smaller the risk for the bank, the more negotiable they will be on the interest rate charged.
Calculate how much you can save.
“Right from the beginning of the home-buying process, it is important to ensure that you know what you can afford to buy and how much deposit you will need,” says Van der Bergh.
“Once you have established how much you need to save, the next step is to figure out how to do so as quickly as possible, and in order to do so, you must analyse your spending habits. On a spreadsheet, list all your fixed monthly expenses including existing debts you are currently servicing and make a note of all other regular expenses like the daily cappuccino at the café near work.
“Next, go through it with a fine-tooth comb to see where you can cut down on monthly expenditure and determine how much you can realistically afford to save, and then shop around for a high-interest savings or money market account in which to save your money.”
Sandy Geffen, Executive Director of Lew Geffen Sotheby’s International Realty in South Africa, says saving a substantial amount of money may seem like a daunting task, but don’t be discouraged.
“At first glance, the cutbacks you are able to make may seem to be small amounts, but you will be surprised at how quickly they can add up to a sizeable sum, and you could own your first home sooner than you think,” says Geffen.
She offers the following creative tips for saving towards your deposit:
- Stop smoking. This could add at least R1 000 a month to your deposit fund.
- Instead of buying takeaways every day, rather spend the extra 10 minutes packing lunch in the morning as it will end up saving you more than pennies at the end of the day, and it’s far healthier.
- Ask for an insurance re-evaluation because while your insurance premiums probably go up every year, the value of a lot of insured items actually goes down as they age.
- Cut back on credit and try to pay off and close store cards, especially if you find temptation hard to resist. Remember that when you do eventually apply for a loan, the bank will ask for an income and expenditure statement to prove that you will have sufficient surplus income for the home loan instalment once all household and contractual debt expenses have been met.
- Before you run out to buy a new seasonal wardrobe, spring clean your closet and unearth the older items of good quality that can be reinvented with accessories or by mixing and matching;
- If you can’t remember what the inside of your gym looks like and can’t motivate yourself to go, cancel that gym contract and find ways to exercise for free. It might help you to start exercising more regularly, especially now that summer is here.
- Consider scaling down on your car if a large portion of your monthly income is going towards paying off a car loan;
- Always go grocery shopping with a list and stick to it - and never go on an empty stomach. Also try and stick to food stores and avoid the hypermarkets where you might be tempted to buy other things you don’t need.
Geldenhuys cautions that this savings mindset should not be abandoned once the goal has been met.
“Many people throw caution to the wind and shop around for a home that costs the maximum amount the bank has approved, however, given current economic conditions, buyers should rather consider buying for a little less,” says Geldenhuys.
“The extra cash can be used to pay off the bond more quickly or saved as a rainy-day fund so that they are prepared for the unforeseen expenses which arise when you own property.”
“It’s true that our parents had it much easier in that most were able to afford their first home long before the current average age of first-time buyers which has risen to 34, but what hasn’t changed is the investment value of owning a home,” says Van der Bergh.
“It is also one of the most exciting and rewarding purchases you will ever make, so even though it may take a little longer, it’s always worth the effort.”