DEPOSIT OR NO DEPOSIT

The best advice one can give to a prospective homeowner, is to save for a deposit. The advantages that go with this advice, may include a better opportunity of getting a loan approved from a financial institution, and/or getting a better interest rate. This would mean considerable savings over the term of the bond. Let’s face it, not all bond applicants qualify for a 100% loan. So if you are planning to buy a home some time soon, now is a good time to start saving for a deposit.

From experience, it can be safely said that a lot of hopes and aspirations are dashed, as early as the “Offer to Purchase” stage. This can lead to disappointment to all the parties concerned, the seller, the estate agent, but more especially, the buyer. Most applicants in the market today for a home loan, are asking for a 100% bond. This means that they are either not prepared to pay a deposit, or they have not saved for a deposit. Banks, after considering several factors, e. g. earnings, expenses, payment history, etc, will only grant a 100% loan if the applicant meets all the required criteria, and better still, will cover the transfer and bond costs.

What happens in the case of the average purchaser? The truth of the matter is, most home buyers today fall in the “average” category. Therefore, in their own interests, it may prove to be good advice for them to seriously consider saving for a deposit before venturing out to look for a property to buy. It must also be taken into account that not all banks work in the same way, i. e. the required criteria to qualify for a home loan, differs according to the banks’ lending policies. Therefore, it would be wise, when making a home loan application, to do so through a reputable bond originator. Going it alone, or through a preferred bank, may not always be the best option.

As mentioned above, whichever way you choose, saving for a deposit, makes good financial sense, as banks may ask for anything from 5% to 20%, or even more depending on credit records available to them. It will be safe to say that some deposit, is better than no deposit at all. Apart from the purchase price of a property, the prospective home buyer must also take into account the other costs associated with buying a property. The immediate costs are transfer costs, transfer duty where the price of a property exceeds R600 000, bond registration costs and initiation fees, where a bond is taken to finance the purchase of the property, and a deposit, should it be required.

The other related costs which come up later are rates, levies in a sectional title or home owner’s association, general maintenance, renovations, utility services, e. g. electricity and water, transport, etc. It has been found that many buyers, although in possession of the required deposit, are reluctant to put down the deposit, but would rather apply for a 100% bond. The intention is to initially get the full bond, then make a huge deposit after registration to bring down the capital to reduce the amount of interest charged. This, according to advice from financial advisors, is not the most effective way to utilise savings.

It must be taken into account that bond registration costs are calculated on the amount of the bond. The higher the bond, the higher the costs. The deposit, would have reduced the amount borrowed significantly, thereby getting a better interest rate. Furthermore, a history of continued and committed savings will show favour during the bond application process. Therefore experience has shown that it is far more beneficial, when applying for a bond, to put down a deposit. It will show considerable savings in the long term.

Talking about savings on a home loan, or any other loan for that matter, here are a few more tips:

• Interest is calculated daily on balances, so change the payment date as close to the beginning of the month as possible, or the day you receive your salary. This may prove to be small on a monthly basis, but over the term of the loan, will prove to be considerable, as interest is compounded on daily balances.
• Whenever you can, pay in more than the stipulated monthly instalment.

This will not only save you thousands of rands in the long term, but will also reduce the term of the loan, and the interest on daily balances. That’s it for this week. If there are issues you would like covered in this column, I would like to hear from you. In the meantime, should you have any queries or questions relating to real estate matters, do not hesitate to give me a call at Acutts (Phoenix/Umhlanga Elite).

Yeggie Naidoo (C.E.A. – NQF4) is a property consultant at Acutts (Phoenix & Umhlanga Elite), situated at Shop 9, Starwood Mall, 3 Andromeda Street, Starwood, Phoenix. He writes in his personal capacity. You may write to him on his e-mail yeggienaidoo@acutts.co.za or you may call him on 079 7044 014, or check out his properties by visiting www.acuttsphoenix.co.za. Refer to the Acutts (Phoenix) advert for more contact details.