How a deposit affects your home loan payments …

You can also listen to this podcast on iono.fm here.

July is savings month, so we have a bit of a savings month theme on the podcast today. With the Reserve Bank’s Monetary Policy Committee meeting this week for a repo rate decision, set for Thursday, another rate hike may be on the cards.

On the latest episode of The Property Pod, South Africa’s premier property investor podcast, we chat to Gavin Kelsey, COO of Just Property.

We speak with Kelsey on why it’s important to save for a deposit for a house, ahead of trying to secure a bond. This is especially important for first-time home buyers who are likely to find it tougher to get into the property market currently, with the 14-year-high interest rates.

Kelsey has over 25 years of experience in the real estate profession.

Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts.

Gavin Kelsey, chief operating officer of Just Property. Image: Supplied.

Highlights

Perhaps you want to give us a brief explanation of what a deposit is, to kick off the conversation?

“The easiest way to sum up what a deposit is, is ‘available funds or additional funds that act as a sort of down payment’. It reduces the amount you have to [borrow] from the bank in order to purchase a property, and in effect reduces your monthly payments, making the purchase of property more affordable.

“The easiest way to do those calculations is to find a property and bond calculator that allows you to investigate for yourself the effect a deposit would have.”

Why is a deposit a good idea?

“Well, the first thing that a deposit does is it gives the bank or the [lending] institution confidence in your cash situation. It also shows good money management. It protects against future interest rate high increases, and the net effect, as I mentioned earlier, is it reduces your monthly bond payments.”

“So wherever possible, the bigger the deposit that one can save and set aside before making the purchase helps to mitigate or reduce the risk later on when there is an interest rate hike, such as we’ve experienced over the last couple of months.”

“I think most home buyers should be looking to put together at least a 20% deposit or more. This is just good practice.”

Read/listen:
Limpopo and Mpumalanga lead residential price increases in SA
R2.5m bond? You could be paying R7 700 more each month
Managing your home loan as interest rates spike

“To give you an example, with a 20% deposit on a R1 million property purchase over 20 years, your repayments add up currently to about R8 670 a month …”

“Now, if you had no deposit, for example, the repayments are R10 800. The difference of about R2 000 a month doesn’t seem significant, but the knock-on effect of inflation and interest rate hikes not only increases your monthly exposure to payments for your property, but increases all the other interest that you’re incurring on any credit card purchases, etc.

“It’s the combined addition of all of those costs that puts people under pressure when the interest rate continually goes up.”

Source: Just Property

“The interesting thing is that whether you purchase, for example at R1 million, or you purchase at R2 million, it’s all driven by the percentage of the deposit that you’re able to pay, so the net saving later on is considerable because your capital amount changes.

“What you can do is reduce the capital amount – and we are going to touch on that – by adding extra income or paying extra towards your bond.”

Gavin, I’m not sure what the average house price is in South Africa at the moment, but if you had to buy a R2 million house, what would the savings more or less be? Do you have an idea?

“Again, it’s kind of in ratio with one another. So with R2 million over 20 years at the current interest rate of 11.75% you’re looking at a bond repayment of around R21 600 … With a 20% deposit, it’s again around R2 000 less every month, being around R19 500.”

“So there are some significant gains to be made depending on the deposit that you can put down – for example, a 25% deposit. It’s not a very significant amount against your R2 million purchase, but you’re saving almost R3 000 a month by adding R50 000 more in terms of your deposit.”

“So the inclination should be to take your time to save for your deposit rather than getting into the market as soon as possible, because it will go a long way to keep you in the game as a homeowner.”

In the current high interest-rate environment, it is becoming more difficult, especially for first-time home buyers, to enter the market – and I suppose it’s not easy for such candidates to get a 100% home loan either? 

“Of course, during this period of interest rate hikes, the banks are also looking at improved criteria in qualifying their first-time buyers – and in fact anybody applying for a home loan. In the end it’s down to affordability.”

“A common mistake that a lot of first-time home buyers make is they take whatever balance of their income is available after they’ve looked at all of their costs and assign that entire amount to the price of the property they want to buy or their monthly repayments. That’s the fatal mistake because we need to build in room for increased interest rates.”

“One of the things we always say is it’s important to get into the market as early as you can, but you have to take your own affordability situation into account.”

“For example, one needs to be able to weather the storm of increasing interest rates over a 20-year period, and it’s quite difficult for a lot of first-time home buyers to conceive that for the next 20 years you’re going to be paying off on a bond and what kind of interest rate changes there are likely to be.

“So you always err on the side of affordability and ease with a cushion available, [rather] than stretch yourself too much …”

Please share some tips on how one would save for that all-important home loan deposit?

“It’s not always easy, but one needs to be quite ruthless with it. Sometimes we come across additional lump sums. You might get a pay increase, you might get a bonus or an incentive, or some commission comes your way. Try to put every little bit somewhere where you can’t get to it. This is the secret behind saving.

“The secret behind putting a deposit together is: where there is extra income, put it away, continue to operate with the expenses and the income that you have, but keep the discipline of not overspending. The old adage of ‘spend less than you make’ is always true in these circumstances.”

How important is a good credit score in terms of securing a home loan and better rates?

“Your credit profile and your credit score are very important and are something that has to be built on. I think that is the crux of the matter. Your credit score is developed over a long period of time and really boils down to how you spend your money on a daily basis, doing certain things like paying all your bills, all your credit that you have.

“Paying on time is best practice and will most certainly help your credit score.”

“Something else that may not be as commonly known is when you do have credit available, try not to get close to that credit limit.”

“So if you have a R5 000 credit limit on a card, try not to get within R500 of that R5 000 because that means that you’re stretching yourself almost beyond the limit – to the ceiling of what you’re capable of repaying. That tends to put one under pressure and [does] not reflect well.”

“So those are some of the tips that I would love to share with the listeners.”

If one has bought a home and comes into some money or a bonus, would you advise paying it into your bond? Does it have an impact and do banks actually make such an option easy to take up?

“Yes, they do. It is recommended because the lump sum does have an impact firstly on the total amount that you owe against the bond – and obviously it depends on how much the lump sum is – but it reduces the total amount owing or can reduce the monthly repayments.”

“This is something that you would negotiate with your financial institution, your bank, whenever you come into a lump sum [if you want to be able to draw on any additional funds you put in but don’t currently have an ‘access bond’ type of account].”

Listen/read:
What first-time home buyers need to know about the Flisp subsidy
‘We’re not betting the farm on the Western Cape’ – Steve Brookes

“So it’s always a good idea to push a lump sum towards your bond repayment. It is the longest credit that you will be involved in, and it has the most opportunity to give you a solid return as long as you hang in there long enough to make this a wealth-creating asset …”

“It is your responsibility really to [speak] to the bank and request how you would like those funds applied to your account. To make note of that and have that recorded is just good practice. It’s key to good money management.

“Record-keeping of how you are interacting with the bank goes a long way to developing your credit score for the future and any future transactions you want to make with them.”