“The trends show that the high number of applicants who take out 100% bonds is aligned to the increased volume of first-time buyers who generally do not have easy access to a deposit,” Schimper said.
The importance of having a deposit
She says estate agents and sellers are more confident about a buyer with a deposit. The buyer’s chances of getting their mortgage approved are higher, so their offer is more appealing than a buyer whose offer is conditional on the sale of another property, or raising a 100% bond.
In addition, when the banks consider whether to grant a home loan, a number of factors are taken into consideration: earnings, disposable income, credit record, age, length of time the applicant has been in their current job and the size of their deposit.
“The larger the deposit, the smaller the risk for the bank when granting a home loan. Simply put, a large deposit enables the bank to lend an amount significantly less than the value of the house, which then acts as security on the loan.”
Because they are taking a lower risk with a deposit, the banks are also more likely to be negotiable on the interest rate, which can save the homebuyer thousands over the bond term. “By providing capital upfront in the home-buying transaction, the amount owed on the property is decreased,” Schimper said.
If, for instance, a home buyer purchases a R1 million property with no deposit at a 9.25% interest rate, they will pay
R9 158.57 per month over 20 years. At the end of the bond term, they will have paid back R2 198 080.40.
On the other hand, with a R100 000 deposit, the monthly repayments will be R8 242.80 and the total repayment will be R1 978 272.36. If the deposit is added to this, the total still only comes to R2 078 272.36 – making the total repayments R119 808.04 cheaper than buying without a deposit.
If you don’t have the cash
Of course, not everyone has a healthy bank balance when they start house-hunting.
“If you’re not able to put down a deposit, a 100% loan will still allow you to pay towards your own property instead of renting. Sometimes putting down a deposit may even compromise your ability to have enough funds for transfer and registration costs. However, this may mean you have to apply for additional finance and face a higher rate repayment.”
To get an idea of what property price is affordable, and the likely chances of getting approved for a home loan, Schimper suggests getting prequalified with a bond originator, which is a free service that ooba provides prior to the home-buying process. Then, once you have an indication of the deposit needed, you are able to consider the best approach needed to obtain the money.
“You can take out a short-term loan of up to R150 000 to fund the deposit.”