Advice and Opinion

National Savings Month feature: Saving for a home loan

Saving towards a deposit on a new home is not only a good way to prove that you are ready to take on the additional costs of being a home owner, but also has concrete benefits in potential lower interest rates and a higher chance of having the loan amount granted.

“Saving is always a good idea, irrespective of the purpose, and the best time to start savings is always right now,” says Tommy Nel, Head of Credit at FNB Home Loans. “Having the discipline of savings is especially important when it comes to buying a home as having the security of a deposit will put you in a stronger position as a buyer.”

Around half of all new home loan applicants are for 100% loans; which means that the applicant does not have the intention of putting a deposit down. First time buyers are less likely to have a deposit available and have generally increased in prominence over the last number of years, according to the FNB 2015 Q2 Estate Agent Survey. Since peaking at 28% in 2014 Q2, the proportion of first time home buyers have come off to some extent, currently at 22%.

“Saving for your home may seem like a huge task, but very worthwhile in the long run,” says Nel. “Firstly, the discipline needed to save a lump sum, such as 10% of the purchase price, is an excellent way to prove that you are ready to take on the costs that come with home ownership.”

Above the bond repayment costs home owners are responsible for municipality rates that are a fixed cost depending on your building size. Additional costs such as water and electricity will be a factor of your own usage and ongoing maintenance and home owners insurance will be new to the bill.

Saving for a deposit has real tangible benefits to your home loan required to purchase the home.

“The potential benefit on the interest rate of putting down a 10% deposit, instead of taking out a 100% loan can be anything from 0.2% and 0.7%, if not more,” says Nel.

This is dependent on other factors including the bank’s assessment of the client’s risk profile.

In rand value, this could mean a saving of R30 000 or R100 00 over the life of a 20 year Home Loan on a R1 million bond.

“Having a deposit will assist in demonstrating to the bank that the applicant has the ability to manage their finances well and live within their means, which means having a deposit can only count favourably when applying for a loan,” concludes Nel.

July is National Savings month and there are other ways you can use your home loan to save.

Tips for savings with a home loan

– Change the installment date to the day you receive your salary. As interest on home loans is charged daily, the earlier you reduce your balance, the less interest you end up paying in total. This movement is very small on a monthly basis, but compound interest makes this small change valuable throughout the entire term of the loan and it is a great way to save on the total interest paid.

– Paying as little as a 10% additional payment per month into your bond could save approximately four years of repayments and R250 400 in interest on a R1m loan over the life of the loan. These calculations have been based on the current level of interest rates. The additional repayment is immediately set off against the capital value of the loan, thereby reducing interest paid and saving you in the long term.