New property trend having severe knock-on effects to home loans in South Africa
The average size of home deposits has grown by 11.9% compared to last year as buyers try to prove their trustworthiness to banks, says Jackie Smith, the head of Buyers Trust.
“The average size of a deposit is 7.5% of the purchase price, but for the first-time buyer segment, the average deposit is 9.7%, just a fraction away from the optimal 10%,” Smith said.
Smith said that banks are becoming more risk-averse and are adopting a more cautious approach to lending money to finance a home following the latest rate hike.
In a riskier environment, banks have more reason to believe that a borrower may default on their loan – making them less likely to approve a home loan of a larger size.
As a result of this, Smith said that her company is seeing more homebuyers putting down deposits when applying for a home loan.
A deposit on a home loan can indicate a prospective buyer’s ability to save and cover future payments, making them less of a risk to lenders.
The country is currently grappling with high levels of unemployment, reduced affordability due to high inflation, higher interest rates and reduced productivity due to ongoing load-shedding,” she said.
“In the current environment, home buyers need to take proactive steps to demonstrate their ability to repay their loans and practice smart financial planning, or risk having their application rejected,” said Smith.
Recent statistics from Ooba Home Loans showed that banks are tightening their lending rates.
While the country’s average purchase price has grown slightly, the size of bonds granted has decreased, with a year-on-year decrease of -0.3%.
First-time buyers are feeling this caution from the banks the most, with their average approved bond size shrinking by -2.7% year-on-year, said Smith.
Successful bond approvals have also decreased over the first quarter of this year from 67.9% to 66.2%.
Smith provided the following top reasons why buyers should prioritise their deposits in the current environment:
- Banks are more likely to approve your desired bond size at an attractive interest rate if you are asking for a smaller loan and are contributing to the purchase by putting down a deposit, said Smith.
- Putting down a deposit on a home indicates to both the banks and the seller that you are serious about following through on your commitment to the purchase, increasing the chances of both your offer being accepted.”
- A deposit reduces the amount you need to borrow, resulting in lower monthly repayments and the associated interest on the loan, making you less vulnerable to the interest rate cycle, Smith added.
- Having a deposit increases one’s equity – the difference between the market value of the home and the amount you still owe on your home loan. The more equity you have, the more you own of the property, and the more flexibility you have in the future.”
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