Paying A Deposit When Buying A Property - What To Know & Benefits
Introduction:
When buying your first home, it can feel a bit daunting to consider how to afford the monthly home loan repayments. It is possible to lessen this expense by paying a deposit. In addition to increasing the chances of securing a home loan, there are many other reasons why a deposit will benefit buyers in both the short and long term.
To try and make it easier for first-time buyers to enter the market, financial institutions have become more willing to grant a 100% home loan, which means that first-time buyers might not be required to pay a deposit to qualify for a home loan.
Some sellers require that the buyer pays a deposit and will stipulate this in the offer to purchase. This provides the seller with more security that the buyer is serious and can afford to go through with the purchase. Buyers need to read the OTP carefully to make sure they are not caught off guard by this, as the sale will not proceed until the required amount is paid. Failing to do this will constitute a breach of contract which will give the seller the right to cancel the deal.
For those who do not have to pay a deposit, there will be bond and transfer costs above and beyond the property's purchase price that will be payable upfront, regardless of whether you have paid a deposit or not. If you do not have this amount saved, you will either need to apply for a 110% home loan or take out a personal loan to cover these costs.
Payment of Deposit - Beware of Phishing
The deposit is not paid directly to the seller but rather to the transferring attorney, who will then place it into a trust account where it will be kept safe until the property transfer and registration is complete. The interest that is generated by the deposit will be paid to the buyer after registration of the property.
With majority of real estate transactions occurring online, opportunities for cybercrime are rife, leaving buyers vulnerable to losing their deposit. These types of crimes commonly and easily occur when e-mail records between the agent, buyer, and the respective lawyers to whom the deposit is paid are intercepted by a malicious third-party. This is commonly known as phishing.
Repayment of Deposit or Chances of Losing Deposit
Should the sale not proceed, there are various possible outcomes for what will happen to your deposit. If your OTP was contingent on your home loan approval, and for whatever reason your bond was not approved, your deposit will be refunded to you. However, if you withdraw your application, then you could be in breach of the contract, and you might forfeit your deposit.
Buyers are reminded that the offer to purchase is a binding contract. If you, as the buyer, are in breach of the contract and it can't be rectified within a specific time frame, you will lose your deposit and the seller has the right to use it to cover any legal costs that have been incurred from the deal falling through.
Reasons Why it is Beneficial to Property Buyers to Pay a Deposit:
- A deposit shows buyer commitment
Providing a deposit will show both the seller and lender that you are serious about taking on some level of risk in the buying process and can afford the purchase. When the buyer find him- or herself in a multi-offer situation on a property, the seller is more likely to accept an offer with a deposit over other prospective buyers' offers without an deposit.
- Reduces the risk for the banks
A deposit will improve the buyer's chances of having his/her home loan application approved as the banks will view it as equity provided by the client into the deal - reducing the bond (home loan) amount. It also places the buyer in a better position to negotiate with the banks for more favourable loan terms and a lower interest rate on the home loan. The higher the deposit, the more manageable and lower the minimum monthly home loan repayments will be for the buyer, reducing the risk for the banks. The gross household income required by the banks will also be much less.
When buying a R1 million property and putting down e.g. a 10% deposit (R100 000), the gross household income required to qualify for a bond at a prime rate of 10% could drop from around R32 000 a month to around R29 000, depending on a buyer's other monthly expenses.
- Short-term cost higher BUT long-term saving due to lower interest rate
While it might be tempting to think that not paying a deposit upfront reduces the initial cost of purchasing a house, this short-term saving will cost you much more in the long run, as 100% loans are usually only granted at interest rates well above the prime interest rate.
- A smaller home loan (after payment of a 10% deposit) plus a 1% difference in the interest rate charged could translate into annual savings of more than R20 000 on your home loan repayments, plus a saving of more than R300 000 on the total interest payable over a 20-year lifetime of the home loan. That is a worthwhile return on the R100 000 initially invested in the home as a 10% deposit.
- Reduces the total amount repaid over loan period
The less you borrow, the less you must pay off. A deposit effectively reduces the overall value or size of the home loan - meaning, the buyer will be repaying a much smaller loan amount after the 20 or 30 year period, than a buyer who did not pay a deposit. Smaller monthly repayments reduce the amount of interest that you need to pay on your home loan over the borrowing period - and this stands to benefit you in the long-term.
A buyer who can afford to pay the same monthly repayment amount as someone who did not pay a deposit, will be able to pay the home loan back much sooner (will be a few years quicker) and before the term completes. In most cases, a good deposit amount is usually around 10-20% of the seller's asking price. The higher the deposit, the more manageable and lower the monthly home loan repayments will be. The savings in home loan interest paid to the bank over time is staggering.
A 10% deposit on a R1 million home loan will reduce the minimum monthly bond repayment from R9650 to R8685, which will reduce household expenditure by almost R12 000 a year
- Saving for deposit is a great practice run for monthly repayment requirements
The required mindset and discipline to save for a deposit sets the tone of what is to come with home-ownership and fulfilling the obligations of monthly repayments in the long term.
- Security to weather future financial difficulties
If a buyer with a 100% home loan loses his/her job and had to sell their home in a hurry, there would be selling costs and agent's commission to pay as well as the 100% loan to repay. They could quite easily end up owing more than the sale price of their property. A buyer who however paid a 10% or 20% deposit, would be able to cope much better in this situation. They will also be in a better position to cope with any future interest rate increases, or to start paying their home off more quickly if interest rates should fall.