July is National Savings month in South Africa, and First National Bank (FNB), one of the country’s largest banks, gives the following tips about home loan saving:
• 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 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 (about US$25 040) in interest on a R1m loan (US$100 000) 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.
Prospective home owners that save for a deposit are not only more likely to obtain a loan, but can also benefit from a better interest rate, which will save them considerable amounts over the term of their bond, the Johannesburg-based bank said, owned by First Rand Bank Limited, said this week.
“For many owners your home will be your biggest asset, so the more it can work for you and help you create wealth, the better. This starts as early as when considering buying a property and saving for a deposit,” Ewald Kellerman, head of sales at FNB home loans, said in a statement.
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, the bank said.
First time buyers are least likely to have a deposit available and they are increasing in prominence. The FNB 2013 Q2 Estate Agent Survey says that 22% of new buyers are first time home buyers.
However, putting down a deposit, even a minimal amount can greatly benefit a home buyer as people who demonstrate the ability to save are typically considered lower risk by the banks.
“Saving for and putting down a deposit on a home loan is a very good way of saving for the future,” Kellerman explained.
“There is no ‘right’ amount for a deposit, banks typically ask for anything from 10% to 20% deposit. However, if you are unable to afford such a high amount at the time, even 5% is better than no deposit at all.”
One should also take into account that there are many other costs to consider when buying property like transfer duty, registration and initiation fees.
“We find that many customers who have saved additional funds or have a surplus after selling their previous property still apply for a 100% bond with the view to deposit the additional funds after the bond is registered,” Kellerman said.
While depositing funds after registration will bring down the capital and reduce the amount of interest charged to the bond, it is not the most effective way to use your savings, it is far more beneficial to put down a deposit for a bond upfront.
New home owners need to realise that owning a home can be expensive in different ways.
“Rates, taxes and general maintenance on a larger free standing house add up quickly and can sometimes end up getting to the point where it is no longer affordable,” Kellerman added.
First time buyers seem to be much more interested in higher density units where some of the communal costs are shared while a number of existing owners are scaling down to save on the increasing running costs of a property.
“Many home owners scale down later on in life to access some of the capital saved in a property. This enables the funds to be reinvested somewhere else for better returns or help to top-up a retirement fund.
“Our 2013 Q2 Estate Agent survey estimates downscaling due of life stages make up 21% of all residential property sales.”
(Issued by FNB, final editing by Issa Sikiti da Silva)