By Jackie Smith
HOME buying statistics indicate that putting down a deposit is becoming less and less of a priority to South African home buyers – a trend that may be to their own detriment, writes Jackie Smith, head of Buyers Trust.
The latest oobarometer for Q2 2022, reveals that the average deposit amount (calculated as a percentage of the purchase price) is 7.8% -- down from 8.4% in Q1 of this year.
This shift in buying behaviour has been steadily building for years, as reinforced by a recent FNB Property Barometer, which noted that South Africans who have purchased a home in 2022 are putting down the smallest deposits seen in 14 years, with banks approving an increasing number of zero-deposit home loans.
But, while prospective buyers may wish to take advantage of this lenient lending landscape to save in the short-term, the decision to not put down a deposit is costing them massively in the long run.
We are concerned that buyers are failing to ‘do the maths’ and not realising that not putting down a deposit of any amount will increase their monthly repayments and the total amount repayable at the end of their loan term.
Buying a home is one of the most important financial transactions that a person will make in their life, and putting aside money for a deposit is the first step in making sure that they are adequately prepared for the extra costs that the process entails.
To illustrate the savings that buyers are failing to capitalise on, Smith compared the monthly and total repayment costs of different deposit amounts on a R1.5m home (rounded up from the national average purchase price of R1 431 712 as per the Q2 2022 oobarometer).
What putting down a deposit of 5, 10 and 15% can save you
The following calculations are based on the average home loan period of 20 years and the current interest rate of 9%, using ooba’s free online Bond Repayment Calculator: 0 percent deposit on a R1.5 million home:
· Monthly repayments: R13 496
· Total amount repayable: R3 239 013
A 5% (R75 000) deposit on a R1.5 million home:
Monthly repayments: R12 821. Monthly savings (versus no deposit): R675.
Total amount repayable: R3 077 063. Total savings (versus no deposit): R161 950.
A 10% (R150 000) deposit on a R1.5 million home:
Monthly repayments: R12 146. Monthly savings (versus no deposit): R1 350
Total amount repayable: R2 915 112. Total savings (versus no deposit): R323 901
A 15% (R225 000) deposit on a R1.5 million home:
Monthly repayments: R11 472. Monthly savings (versus no deposit): R2 024.
Total amount repayable: R2 753 161. Total savings (versus no deposit): R485 852 – close to half a million rand in savings over the long-term.
I would urge prospective home-buyers to think strategically and wait until they have enough money saved to put down a deposit before they begin the home-buying process.
Saving up for a deposit indicates that a buyer is prepared for the significant financial responsibility that comes with buying a home and can put them in a better position to negotiate an interest rate below prime from their lender.
Even a 5% deposit makes a substantial impact on their monthly repayments and will help them to budget accordingly in these challenging economic times with the cost-of-living increasing and the ever-present risk of interest rate hikes.
Making sure that your deposit is protected
Once a buyer has made the decision to put down a deposit, they need to take the necessary steps to make sure that it is adequately protected -- or risk seeing their hard work go to waste.
The unfortunate reality is that cybercrime is on the rise in South Africa and choosing to entrust your deposit with an estate agent or the transferring attorney may not give your deposit the high-level of security a financial transaction of this size requires.
Opting instead for a secure third-party alternative such as Buyers Trust ensures a buyer’s peace-of-mind and in a sense ‘rewards’ them for being conscientious enough to save up for a deposit.
This is because they are guaranteed a competitive return on their investment as the deposit is stored in an investment-bearing account under the buyer’s own name, which is then paid out as soon as the transaction is completed.
* Jackie Smith is head of Buyers Trust, a registered financial services provider.
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