Beat Interest Rate Woes: Increase Your Deposit. Here’s How...
When interest rates rise, monthly home loan repayments go up, too. This puts the dream of owning property out of reach for some prospective buyers. But there’s hope. "Deferring the dream for a year or two in order to save towards a larger deposit will decrease the amount you have to borrow, and the amount you pay in the long term,” says Paul Stevens, CEO of Just Property.
What is a deposit? A deposit is usually 10% of your purchase price. It is paid to the transferring attorney or estate agent, who manages it on your behalf until the property registration process is complete.
A deposit will:
- Enhance your affordability and increase the likelihood of mortgage approval
- Give you leverage when negotiating a more favourable interest rate (due to reduced risk for the bank)
- Minimise the interest you’ll pay over the duration of the loan
- Reduce your monthly bond repayments
- Enhance your attractiveness to sellers
- Improve your negotiating power
Prospective first-time homebuyers aiming to acquire a property valued at R1 million may be eligible for a 100% bond. If this is not the case, a 10% or R100 000 deposit is typically required.
Imagine you were to take the R1 million bond today, with interest rates at 11.75%. Without the deposit, your monthly instalment will be R10 837 but if you were to increase your deposit to 20% or R100 000, your monthly repayment will be R8 670. It can be done, and just imagine, over 20 years, how much you’ll be saving.
How to save R100 000 in two years
Individuals who have yet to enter the property market often feel overwhelmed by the deposit amount necessary for a home loan. “But you’ll be astonished at how quickly the savings from temporary adjustments to lifestyle and spending habits can mount up,” says Stevens. “And what is two years of tightening your belt if it helps you enter the property market and significantly decreases your long-term bond repayments?”
To add R100 000 to your deposit, you’ll be aiming to save R50 000 per year over the next two years. That would require a monthly saving of approximately R4 200.
Stevens offers these ten changes to help you start saving for a larger deposit:
- Investigate where you can cut expenses – items like cosmetics, cleaning supplies and grocery basics are good options. Compare prices on the shelves and always opt for the cheapest alternative. Research potential savings at different wholesalers and try to find out what each supermarket store has identified as its “loss leader”. Depending on where you live you might, for instance, choose to buy your meat and dairy from Checkers, name-brand cleaning products from Makro and fruit from Woolworths.
- When out shopping, only purchase necessities and focus on special offers. Better still, use online shopping so you’re not tempted in the aisles. But also identify a few luxuries you can indulge in now and then - like the best coffee beans or a fabulous after-dinner chocolate.
- Put that R4 200 away at the beginning of each month rather than attempting to save what remains after expenses. Bank your savings in a 72-day call account that offers a higher interest rate as well as accessibility while discouraging impulsive withdrawals.
- Aim for homemade dishes instead of ready-to-cook or takeaway meals. This can lead to significant savings. Cook in bulk one day a week, eat one portion that night and refrigerate the remainder, so that you also cut down on electricity usage.
- Evaluate the need for two vehicles if you’re part of a couple. Consider selling one vehicle and opting for a scooter or downsizing to a single vehicle, especially if one or both of you work from home. Although this may seem a significant sacrifice, the reward of owning a home in just two years’ time will make it worthwhile.
- Is your insurance policy current regarding the value of assets such as vehicles and computers? Find out if your premiums can be lowered.
- Is it necessary to take that next upgrade on your phone? Sticking with your current model and downgrading to the cheapest contract can save hundreds of rands a month. Could you join a cheaper gym or cancel your membership and take up running for the next two years instead?
- Could you start a side hustle, tutor over the weekends, or wait tables one or two nights a week? Think about what else you could do (or sell) to bring in extra money. Pay it straight into the savings account.
- If you rent, consider temporarily downsizing to a smaller rental unit. This will reduce rental expenses while you save for your deposit. Keep in mind that this arrangement is temporary, and the ultimate goal is to move into one's own home.
- If you receive a bonus, monetary gift, or commission, keep 5% to spoil yourself, and pay the rest into your savings account. Using a portion to take advantage of special bulk-buy deals is also a good option.
“These actions will also help you rehabilitate your credit history if that’s necessary,” says Stevens. “A good credit score may well help you negotiate lower interest rates when you apply for your bond.”
Once you’ve bought your home, move your focus to paying off your bond as fast as possible. “Ease up on the pressure to save by all means, but keep some of those habits in place,” Stevens advises. “The quicker you pay off your bond, the less you’ll be paying in interest.”