How a deposit affects your home loan
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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 it comes to negotiating the interest rate charged on the home loan.
However, with the costs of purchasing a home being as expensive as it is, many choose to forgo the deposit. BetterBond reports that only two out of ten customers apply for 90% LTV, while six out of ten customers are requesting a 100% LTV.
Speaking into 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 a buyer need to save for roughly a 10% deposit on the asking price, but the buyers 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 Rands. By reducing the lending amount by paying a deposit, homeowners will end up saving a substantial amount in interest charges over the course of their loan term.”
To illustrate the point, look at 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).
Also, 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 in this regard.
Beyond what buyers stand to save, Goslett also reminds buyers that paying a deposit will increase their chances for bond approval.
“Our partners 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,” says Goslett.
“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. At that point, those years of discipline and sacrifice it took to save up for the deposit will look like time well-spent when considering the long-term financial security and return on investment this decision has to offer,” he concludes.