Although banks are granting mortgage loans against smaller deposits, it still makes sense to save up for a deposit, as much as possible, before buying.
According to the latest FNB Property Barometer lenders are now willing to finance a relatively bigger proportion of the purchase price of a property. The report found that loan to price (LTP) value, estimated using Deeds Office data, has gradually increased over the last two years, reaching 90.6% in the second quarter of 2019, up from 88% in the second quarter of 2017. Although still some distance below the all-time high of 96.8% in the fourth quarter of 2007 - at the height of the last property boom - this represents the highest LTP in over a decade.
The report also showed that there has been 4.9% year on year growth in the volume of mortgage transactions - the highest growth since November 2010. This indicates that the banks are keen to finance property purchases, which is good news for buyers, especially those wanting to get a foot on the property ladder for the first time.
Big deposits still preferable
Even though you may well have your home loan application granted with only a small deposit – or even no deposit – it’s still in your best interests to put down as large a deposit as possible.
• Lower monthly instalments
It stands to reason that if you repay a R1 million loan plus interest over 20 years, your monthly instalments will be higher than if you put down a deposit of R250 000, and borrowed only R750 000.
On a R1 million loan - with no deposit and at 10% interest - your monthly repayments would be R9 650 over a 20 year period. With a R100 000 deposit, your R900 000 loan will cost you R8 685 a month. And with a R250 000 deposit, your R750 000 loan will cost you R7 238 a month – a difference of R2 412 each month.
• Pay off your home loan sooner
If you then also add the R2 412 you will be saving on the monthly instalment to your bond repayment, you could be bond free within 10 years, instead of 20. This will free up significant cash flow enabling you to invest in further properties or other investment vehicles, making it possible to create significant personal wealth.
• Pay less for your home
With a R1 million bond your home will ultimately cost R2.316 million if you pay only the minimum instalments over 20 years at 10% interest. If you borrow just R750 000, the total cost of the home will be R1 987 120. With this option you get your R250 000 deposit back, plus interest amounting to R78 880.
• Lower rate of interest
When evaluating loan applications, financial institutions take into account a number of factors. These include your credit report from credit bureaus, your monthly income and the size of deposit you have available. With a good credit rating and adequate monthly income, you could possibly qualify for a home loan. However, the addition of a substantial deposit will significantly lower the interest charged on the loan.
This, in turn, means lower monthly repayment commitments, and if you plough the difference into your bond you will be able to significantly shorten the term of the loan.
• Higher equity in your home
A bigger deposit means immediate higher equity in your property. Equity refers to the difference between the market value of a property and the amount you still owe to the financial institution that holds the mortgage. Higher equity enables you to use your property as security to raise money, for example, to start a business, invest in more property or pay for further education for your children - or yourself.
• Bigger profit on resale
If you sell the property before the end of the mortgage term, the outstanding amount on the loan will be deducted from the purchase price. A bigger deposit means a smaller outstanding amount on the bond, leaving you with a bigger profit.