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Saving for a home loan in your best interest

Saving towards a deposit on a new home is not only a good way to prove that you are ready to take on the additional costs of being a home owner, but also has concrete benefits in potential lower interest rates and a higher chance of having the loan amount granted.

“Saving is always a good idea, irrespective of the purpose, and the best time to start savings is always right now,” said Tommy Nel, head of credit at FNB Home Loans.
Having the discipline of saving is especially important when it comes to buying a home as having the security of a deposit will put you in a stronger position as a buyer.
Around half of all new home loan applicants are for 100 per cent loans; which means that the applicant does not have the intention of putting a deposit down.
“Saving for your home may seem like a huge task, but very worthwhile in the long run.
“Firstly, the discipline needed to save a lump sum, such as 10 per cent of the purchase price, is an excellent way to prove that you are ready to take on the costs that come with home ownership.”
Above the bond repayment costs, home owners are responsible for municipality rates that are a fixed cost depending on your building size. Additional costs such as water and electricity will be a factor of your own usage and ongoing maintenance and home owners insurance will be new to the bill.
Saving for a deposit has real tangible benefits to your home loan required to purchase the home.
“The potential benefit on the interest rate of putting down a 10 per cent deposit, instead of taking out a 100 per cent loan can be anything from 0.2 per cent and 0.7 per cent, if not more,” said Nel.
This is dependent on other factors including the bank’s assessment of the client’s risk profile.
In Rand value, this could mean a saving of R30 000 or R100 000 over the life of a 20 year home loan on a R1-million bond.
“Having a deposit will assist in demonstrating to the bank that the applicant has the ability to manage their finances well and live within their means, which means having a deposit can only count favourably when applying for a loan.”
Tips for savings with a home loan include:
* Change the installment date to the day you receive your salary. As interest on home loans is charged daily, the earlier you reduce your balance, the less interest you end up paying in total. This movement is very small on a monthly basis, but compound interest makes this small change valuable throughout the entire term of the loan and it is a great way to save on the total interest paid.
* Paying as little as a 10 per cent additional payment per month into your bond could save approximately four years of repayments and R250 400 in interest on a R1-m loan over the life of the loan. These calculations have been based on the current level of interest rates. The additional repayment is immediately set off against the capital value of the loan, thereby reducing interest paid and saving you in the long term.

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