Deposit or 100% bond?

There are many benefits to putting down a deposit for your first home, but in today’s tough economic climate, it may be more realistic to take out a 100% bond. How do you know what is the best option?

According to Christa Schimper, regional sales manager at ooba, South Africa’s largest bond originator, the reality is that many first-time homebuyers do not have the luxury of a deposit, despite an upfront sum being very beneficial in the home buying process.

“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. ooba statistics show that 53,2% of all applications received are from first-time home buyers, so it is essential that these candidates consider both sides of the coin before applying for a home loan,” says Schimper.

The importance of having a deposit

She says that estate agents and sellers are more confident about a buyer with a deposit. The buyer's chances of getting a bond 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 or not to grant a home loan, a number of factors are taken into consideration, such as 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 a significantly less amount 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 of rands over the bond term. “In addition, by providing capital upfront in the home-buying transaction, the amount owed on the property is decreased, so a smaller bond is required, which significantly reduces the amount of interest owed,” says Schimper.  

If, for instance, a home buyer purchases a R1 000 000 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.

“The example of R119 808 is a significant saving,” says Schimper. “By putting down a deposit, you will avoid paying interest on that amount of money for 20 years.”

And if you don’t have the cash

Of course, not everyone has a healthy bank balance when they start house hunting.

“If 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 that 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, Schrimper 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,” says Schimper. “Of course this means that you are paying interest on that loan, and it may have an impact on your affordability by reducing your surplus income, but it could make a difference to your chances of approval.”

Prospective home buyers can also turn to family members for a loan with a preferential interest rate or consider buying the property with a partner who can help to fund the deposit. “These agreements need to be carefully documented to avoid any later confusion, but sharing the financial burden with a partner or family member can ease it considerably.”

Schrimper advises that every individual and property is unique, so it’s best to approach a home loan expert long in advance of buying a property to get the best advice on how to structure your finances and application for your best chance at success.

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