Bigger Property Deposits Means Bigger Benefits

Many people are irked by the fact that 100% home loans are no longer freely available, but on the other hand it must be said that the bigger the cash deposit that potential homebuyers can make, the more benefit they will derive, even when interest rates are low.

That's the word from Berry Everitt, MD of the Chas Everitt International property group, who notes that the latest statistics indicate that the average deposit now required by the banks has fallen from an average of around 18% a year ago to about 12%.

"This does of course make it easier for new buyers to get into the market, in the sense that they no longer need to have as much cash saved up and can buy now while prices are still low. However, the long-term implications may actually not be as positive, because no matter what the purchase price, a smaller deposit means a bigger loan, which means, firstly, that the borrower must earn more in order to qualify, and secondly, that the minimum monthly repayments will be higher.

"This, in turn, will restrict the borrower's ability to pay the loan off faster and save a large amount of interest - a situation that may be exacerbated by the fact that the banks often charge higher rates of interest on low-deposit loans."

Taking the example of a home costing R800 000, he says a 12% deposit would equate to a loan of R704 000 and a minimum monthly repayment of just over R6300, at the current prime interest rate of 9%.

"The buyer who pays an 18% deposit, however, will require a loan of just R656 000, and face a minimum monthly repayment of under R6000. He may well then be in a position to pay an additional R300 a month off his loan capital, which would enable him to pay off his home two years earlier and generate interest savings of about R108 000 - or more than twice the additional amount of deposit cash paid (R48 000).

"In short, it always pays to put down the biggest deposit you can muster, even when interest rates are low and there is an urgency to get into the market."