Saving for home deposit

The biggest obstacle to ownership for many young people is the lack of a deposit.

Lifestyle changes have a part to play in young people buying their first homes much later.

Millennials like to travel more than their parents did, and tend to stay single longer. Many are also only starting to work at a later stage, but the biggest reason for the delay is that they don’t start saving for a deposit soon enough.

People in their 20s now often have study loans, car payments and credit card debts on top of rent and other monthly living costs.

But if they want to be homeowners – or even just to buy an investment property –they should start saving and putting the power of compound interest to work.

Those who start saving now could accumulate a R50 000 deposit in five years by paying R720 a month into a normal bank savings with 6% interest a year.

But if you wait to start saving for a deposit until two years before buying, you will need to save almost R2 000 a month reach your R50 000 goal, putting more strain on your household budget and causing postponement or abandonment on your home purchase plan.

On the other hand you might decide at that stage to go ahead without a deposit, and apply for a 100% home loan. It is possible to get 100% loans, especially if you are a first-time buyer purchasing an affordable home.

However, your credit record has to be excellent and you will have to pay a premium interest rate – usually about two percentage points more than the prevailing prime rate – so the total cost of your home over the 20year life of the bond will be much higher.

The total cost of a R500 000 home bought with a 100% loan taken over 20 years at an interest rate of 12% would be R1.32 million, while the total cost of the same home bought with a R50 000 deposit and a 90% home loan at an interest rate of 10% would be R1.04 million.

You would save around R280 000 just because you took the time to save up that deposit – and your monthly home loan instalment would be more than R1 000 lower.