19 Aug 2010
Over the last couple of years, the banks' lending criteria have become increasingly stringent, and in particular, deposit requirements have remained high. Some banks have adopted policies of only awarding bonds at a 70% loan to value. That means a deposit of R300 000 required on the purchase of a R1m property, a steep requirement for most prospective homeowners. More recently banks have changed these policies and have become more competitive.
However, the difficulty in obtaining a 100% bond is not the only reason why it is imperative to save up a deposit for a property purchase. Even if you do obtain a 100% bond, you will still need additional funds to cover the many other costs related to buying a property, such as the transfer duties and numerous fees that add up to significant amounts. Beyond this, however, there are substantial financial benefits to be realised over the longer term, if you can put down a deposit. The bigger the deposit you can make, the less money you have to lend from the bank at high interest rates, and the less interest you will have to pay the bank over the next 20 years. Furthermore, homeowners who contribute from their own pocket to finance a property are considered a lower risk of default to the bank, which means the bank can offer a lower interest rate on the home loan. Even a 1% reduction in the interest rate on your home loan will save thousands of rands over the term of the bond. These savings, in many cases, add up to far more than the deposit amount. A deposit will also ensure that the monthly repayments on the home loan are lower, which improves your affordability score and allows you to apply for a higher bond amount than you could if you had no deposit. So when should you start saving for your first property? From the day you receive your first salary cheque. The sooner you start the better and the reason for this is what Albert Einstein called the eighth wonder of the world: compound interest. While it simply refers to earning interest on interest already earned, the snowball effect compound interest creates in exponentially growing even small investment, given time, is truly a wonder. For example, if you save just R100 a month over 40 years with a 10% escalation, you will accumulate more than R2m. If you save R1 000 a month - ten times more - over 20 years - half the time - with the same 10% escalation, you will accumulate far less: just over R1.5m. This is the power of compound interest - growing your money exponentially faster the longer it is allowed to work. As such, the youth have a massive advantage in terms of building wealth, because they have more time to allow the wonder of coumpound interest to work for them. It is unfortunate that so few young people realise the power they hold in their hands to secure their financial future, by saving even the smallest amount every month, and allowing compound interest to work for them. The sooner you start saving, the bigger the deposit you will be able to bring to the table when negotiating a home loan, and the more you will benefit financially from the savings in the interest payable over the life of the bond, the lower interest rate you can obtain, and the higher value property you can afford. However, even if you missed the opportunity to start saving when you received your first salary cheque, it is never too late to start. Start saving right now, and don't let another month go by in which compound interest could have been working for you!