The first-time buyers’ market was stimulated by the recent announcement in the budget speech to adjust the threshold for transfer duties. While removing this cost on homes priced up to R1 million will help many first-time buyers enter the market, buyers will still need to cover the various additional costs involved in buying a home, including deeds office transferring fees, bond registration costs, bank initiation fees and other administrative expenses.
This makes the option of a 100% home loan incredibly tempting. But you need to weigh the costs, like a higher interest rate.
According to BetterBond, the amount of 100% home loans increased by 34% and accounted for 49% of all bonds granted in 2019. It seems that financial institutions are increasingly willing to grant these sorts of home loans - and, it is not difficult to understand why.
Banks can justify charging a higher interest rate on 100% home loan because the risk carried by the bank on these bonds is higher than on a bond with a deposit. Buyers who pay a deposit prove their financial stability and lower the total lending amount which therefore increases banks’ flexibility when it comes to negotiating a lower interest rate on the bond.
Before opting for a full bond, Goslett suggests that buyers contemplate the power of compound interest on a home loan. For example, at the end of the 20-year lending period, you will spend roughly R50 000 more in interest alone on a R1 million bond if you buy without a deposit.
Calculate how much a lower interest rate can save you here.
Still, in today’s tough economic climate, saving R50 000 over 20 years might seem to be a relatively small price to pay when considering how long the alternative might take to save up for both a deposit and the extra fees involved in purchasing the home, which will amount to well over R50 000.
Goslett reassures those who are getting impatient about waiting to save up for a deposit by highlighting that, according to BetterBond, the average age of those who were granted bonds in 2019 is 37-years-old, which means that young buyers have plenty of time to save if they want to keep in line with the national average.
“While it is advisable to have a sizable deposit saved when applying for a home loan to save on interest costs, each of the finance options will end up suiting the needs of certain buyers better than others. It is up to you to weigh up the pros and cons of each option carefully, seek professional advice, and then decide which solution works best for your needs,” says Goslett.
Whatever you decide, he recommends taking out an access bond. “This way, if you’re making extra payments into your home loan, you can access the money from your bond if ever you run into financial trouble, or need the money to do renovations on the home.”
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