With interest rates rising again, monthly home loan repayments have gone up too. This has put 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 bond 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
READ: Small living, Big savings | Why downscaling your home might relieve some financial pressure
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.
Savings - 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.
Homemade meals - 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.
Insurance - 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?
Side hustle - 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.
Rent - 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.
More Savings- 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.”
Read: First-time homebuyers' fears - how to overcome them
An article published on October 12, 2018, features Mpho Ramatong, FNB Home Finance Division Channel Head: Housing Schemes, who said when lenders assess an application, affordability, which considers your total income relative to living expenses, is an important measure used to determine whether you would be able to keep up with monthly home loan instalments or not.
This can further influence the home loan amount and interest rate you would be quoted for the term of the loan.
“Therefore, taking the time to ensure that your living expenses are declared correctly can go a long way to ensure that you get the best possible bond deal from your bank,” said Ramatong as she unpacked some of the common mistakes that consumers make when completing the expenses portion of a home loan application:
1. Duplication
Some applicants fail to get a good home loan deal due to the duplication of expenses.
For example, if you have declared funds that you prepay into your credit card monthly, which you may be using to fill up for petrol and for groceries, you need not complete the groceries and petrol expenses portion in the form.
Ramatong said another form of duplication may arise if you are co-applying with a partner or individual that you stay with. In this instance, only one applicant may declare shared living expenses. For example, rent, water and electricity costs.
If the expenses are duplicated, lenders may not always be aware that the co-applicants stay together and share some expenses.
2. Dishonesty
Being dishonest about your living expenses may lead to your application being declined.
When applying for a home loan, banks require that you submit a payslip and six months’ worth of bank statements, amongst other documents. As a result, any disparity in the expenses portion of the form can easily be picked up by the bank.
3. Entertainment
Be careful not to mistakenly declare a high entertainment expense by failing to separate needs from wants.
For example, a need could be monthly costs for educational or recreational activities. A want can be anything that you would possibly cut back on in tough times, such as movies or eating out at restaurants, and so forth.
Want all the latest property news and curated hot property listings sent directly to your inbox? Register for Property24’s Hot Properties, Lifestyle and Weekly Property Trends newsletters or follow us on Twitter, Instagram or Facebook.
Print
