The deposit is your contribution to the purchase of a house or a car while the rest of the finance is provided by the lender. If you manage to place a deposit of 10% to 20% of the value of the asset, you will have the best chances of securing a loan. Furthermore, you will be able to obtain a lower interest rate as well.
Home loans are 'higher than ever'
The lending standards in South Africa are becoming ever stricter while interest rates on loans are expected to climb up. This will make lenders even more cautious when they are graining loans. The borrowers who can afford to place a larger deposit will be much more likely to obtain the required finance.
The first thing which you need to do is to calculate how much you can afford to borrow given your current income, debt and other expenses. Use a loan calculator and enter the current interest rate to calculate the size of the monthly instalment. Then you need to calculate how much money you can afford to put aside and use as a deposit. Look into the value of the asset that you want to purchase and calculate the deposit amount as a percentage of it. You should aim for 10% at least. Then you can divide the sum by the number of months you have for saving before you apply for the loan.
One effective way in which you can save for a deposit is to put aside the difference between your rental rate and the monthly cost you will incur as a homeowner. The cost of homeownership includes not only the home loan instalments, but other expenses such as insurance premiums, taxes and maintenance costs. When you get used to saving the difference, you will prepare your budget for the pressure will homeownership will create and this is highly beneficial. With proper budget management right from the start, you will be at lower risk of defaulting on your home loan and losing your house.
There are various saving options depending on how long you plan to save for and on how flexible you want your savings to be. If you plan to save for a year or two, you should consider a savings account with a high interest rate. A money market fund is a good alternative as it produces higher returns compared to a traditional savings account while the risk involved is fairly low.
In order to put your money in a money market fund, you will need to place a minimum deposit initially. This savings option is more flexible compared to a traditional savings account as you can withdraw any amount of money without penalty. You can readily access the funds if your plans change and you buy a home earlier.
Home Purchase Cost
There are several types of costs which you have to pay when buying a house. The bond registration cost and the transfer cost are the largest ones due upfront. The bond registration cost is around 2% of the value of the property while the transfer cost is close to 3% of the value. You will have to take into account the cost of moving to your new home and the cost of any repairs and maintenance work.
The cost of setting your connections to the electricity, water, TV and internet suppliers is also a major factor. You may be required to place a deposit. It may be cheaper to transfer the accounts from the previous owner. You will have to pay home insurance premiums as well. It is worth investing in the security of your home so you will have to provide for these expenses as well.
Overall, the sooner you start saving, the better your chances of buying a home will be.