A deposit can save you thousands in interest on your first home
I recently got an opportunity to hang out with executives from businesses that offer support to the housing market.
The primary reason I went to the meeting was to attempt to find out about the challenges you, the readers of this newspaper, face when buying a home.
The executives gave me the sense that many South Africans were reluctant to buy houses or flats in which to live or rent out. The reason for this is the flat economic growth and the job creation challenge in a country with unambitious policymakers and implementers who have instead turned the fiscus into their personal bank accounts.
One bank executive told me that companies do have cash stashed away but they are reluctant to spend the funds until they are certain about the direction that this country is taking. Who would blame them.
I, for instance, would not dare to take the cash that I have saved for many years to buy a residential property in a community unless I thought the property will appreciate in value.
Stephen Whitcombe, BetterBond's regional manager in Limpopo, Johannesburg and North West, said load-shedding was also a major concern for residential property investors. He added that 48% (77,000) of those who bought homes last year were first-time buyers.
But I was most interested in Whitcombe's point that the percentage of loans that banks are granting for 100% of the value of the property was improving while the default rate was also dropping.
He said there were instances of the banks giving borrowers interest rates of prime less 1%. However, banks grant this favourable interest rate to clients who manage to pay a substantial deposit.
"That would be a buyer who doesn't want a 100% loan. Maybe that person is not a first-time buyer, with a fantastic credit record and has given a nice deposit, which reduces the risk for the bank. If the risk for the bank is less, they provide a better interest rate," he said.
Whitcombe said if you are a first-time buyer and you've hardly had any retail accounts or any history with a credit bureau, an interest rate of the prime rate plus 3% was not impossible.
You will do well to be patient for about five years while you save up.
If you are eyeing a house that costs between R600,000 and R900,000, and you save an amount between R2,000 and R3,000 a month (increasing each year with inflation) in a simple bank account earning just 7% interest a year, in five years you could have saved between R100,000 and R150,000, giving you about a 15% deposit on your house.
This money would see you obtaining a favourable interest rate and a lower repayment or potentially paying off your house sooner than those who did not cough up a deposit.