Saving for the deposit on a home is like training for the Comrades Marathon – the earlier you start and the more regularly you run, the better, so that your body has time to adjust to the strain and build up the necessary muscle and stamina.
So says Rudi Botha, CEO of BetterBond, SA’s biggest bond originator, who notes: “Everyone knows that the best time to start training for next year’s Comrades is just after this year’s race, and getting ready to buy a home is the same – it takes time as well as discipline.”
At the moment, he says, the main obstacle to ownership for many young people is the lack of a deposit. “It is true that lifestyle changes have a part to play in young people buying their first homes much later than they used to. Millennials like to travel more than their parents did, for example, 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 to pay off, car payments to make and credit card debts on top of the rent and other monthly living costs, so there is usually not much salary left to save every month, but if they want to be homeowners – or even just to buy an investment property – we believe they should start saving that little bit anyway and putting the power of compound interest to work.”
The way this works, Botha explains, is that those who start saving now could accumulate a R50 000 deposit in five years just by paying R720 a month into a normal bank savings account that pays around 6% interest a year.
“But if you wait to start saving for a deposit until two years before you want to buy, say, you will need to save almost R2000 a month in that same bank account to reach your R50 000 goal. That will obviously put much more strain on your household budget and might well cause you to postpone or even abandon your home purchase plan.”
On the other hand, he says, you might decide at that stage to go ahead without a deposit, and apply for a “100%” home loan, not knowing how much extra this is going to cost you in the long-run.
“It is of course quite 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 20-year life of the bond will be much higher.”
For example, Botha says, the total cost of a R500 000 home bought with a 100% loan taken over 20 years at an interest rate of 12% (the current prime rate plus two percentage points) would be R1,322m, 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 R1,043m.
“In other words, 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 R1000 lower. That’s a winning strategy worthy of a gold medal.”