Upside to paying a deposit on a bond

OF course no-deposit or 100% home loans do make it easier for young buyers and first-timers to get a start in the property market, and since the total withdrawal of such loans in the 2009 recession, they have steadily become more freely available, especially for the purchase of lower-priced properties.

“This is no doubt a reaction on the part of lenders to the recent contraction in the economy and growing employment uncertainty on the part of consumers, and it underlines the fact that it is always preferable for home buyers to pay a deposit if they possibly can,” says Shaun Rademeyer, the CEO of BetterBond Home Loans, South Africa’s leading mortgage origination group.

If someone with a new 100% home loan were to suddenly lose their job, for example, and had to sell their home in a hurry, there would be selling costs and agent’s commission to pay, as well as the 100% loan to repay, so they could quite easily end up owing more than the sale price of their property.

“The buyer who had paid a 10% or 20% deposit would obviously be able to cope much better in this situation, and it is worth noting that those who put down a deposit are also typically granted their loans at a lower rate of interest, which makes it easier for them to keep up with monthly repayments when times are tough.”

In addition, Rademeyer notes, those who save up a deposit before buying will save a significant amount on the total cost of their home over the loan period.

“For example, a R650 000 home bought with a 100% loan at 10,25% would cost a total of more than R1,53 million over 20 years. The same home bought with a deposit of R65 000 and a 90% loan would cost a total of about R1,38 million.

“That is a saving of more than R150 000; a pretty good return on the R65 000 that the homeowner ‘invested’ as a deposit. And it is likely to be even better if the buyer is able to secure a better interest rate by paying that deposit.”