How a deposit affects your home loan

While it is possible to take out a 100% home loan, putting down a deposit will reduce a buyer’s monthly instalments and increase their bargaining power when the interest rate charged on the home loan is negotiated. However, with the cost of purchasing a home being as high as it is, many choose to forgo the deposit. South Africa’s leading bond originator, BetterBond, reports that only two out of ten customers apply for 90% loan-to-value (LTV), while six out of ten customers are requesting 100% LTV.

Highlighting the benefits of purchasing with a deposit, Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, encourages buyers to plan for the long-term and not just the immediate future.

“Not only will buyers need to save for roughly a 10% deposit on the asking price, but they will also need to budget for the various ad hoc expenses that come with purchasing property, including registration fees and transfer duties.

“While it can be challenging to save up enough to cover these costs, buyers need to remember that they will be paying off the home loan for 20 or even 30 years - the accumulated interest on this can amount to hundreds of thousands of rand. By reducing the lending amount by paying a deposit, homeowners will save a substantial amount in interest charges over the course of their loan term,” he says.

To illustrate the point, BetterBond provides the following example: On a R1-million bond at prime of 7% with a 10% deposit of R100 000, buyers pay R7 000 per month, which amounts to R1 674 646 over 20 years. But, those who do not put down a deposit will pay R7 750 per month, which totals R1 860 717 over 20 years. By paying a 10% deposit, buyers save R750 per month and R86 071 on the loan (if you deduct the R100 000 paid for the deposit). BetterBond also reports that the interest rate the bank is prepared to offer will be more competitive when buyers put down a deposit, so buyers stand to make even further savings.

Beyond what buyers stand to save, Goslett also reminds buyers that paying a deposit will increase their chances for bond approval. “Our partners at BetterBond report an approval of around 67% in the 100% LTV applications. They report that the approval ratio is 4% better when buyers put down a 10% deposit, and this approval ratio gets better as the deposit amount increases,” he says.

“While saving for a deposit is never easy, it will make it more affordable to pay off a lifelong asset that will offer financial security well into a buyer’s retirement. Those years of discipline and sacrifice it took to save up for the deposit will prove to be time well spent when considering the long-term financial security and return on investment this decision has to offer.”