Tommy Nel, head of credit at First National Bank (FNB) Home Loans, has highlighted the benefits of putting down a deposit when you lend money from the bank to purchase a home. By placing a deposit on a property and not applying for a 100% loan, you should get a lower interest rate, and have a higher chance of getting the loan approved.
“Having the discipline of savings 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,” said Nel.
“The average size of the deposit people put down on a property will differ from one bank to the next based on the bank’s risk appetite and credit policies, but one of the leading mortgage origination companies have publically quoted an average deposit level of around 15%. Our analysis of publically available deeds office information also supports such levels for the overall new business market,” revealed Nel.
Home loan applications
According to FNB, almost half of new home loan applications are for 100% loans. It’s typically the first time homebuyers who don’t put down deposits and apply for 100% bonds. .
Nel pointed out: “In terms of new property acquisitions for the overall market, we estimate that between one in four and one in five customers are approved for 100% loans. This will, however, be slightly lower for first time home buyers. Note that, for first time customers with good credit track records, irrespective of not having owned a property before, 100% finance is fairly readily available.”
There are many long term benefits of putting down a deposit when purchasing a property, according to Nel. “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% of the purchase price, is an excellent way to prove that you are ready to take on the costs that come with home ownership.”
He added: “The potential benefit on the interest rate of putting down a 10% deposit, instead of taking out a 100% loan can be anything from 0.2% and 0.7%, if not more.”
However, FNB stressed that the interest rate will depend on your risk profile.
“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,” said Nel.
It is important to remember that when purchasing a property, you are not only responsible for the bond repayments, but also the municipal rates, and water and electricity, as well as maintenance of the property. Legal fees are also costly and are not covered by the bond. These are costs that need to be considered when planning to purchase a property.