Very simply, a deposit is an amount of money that you pay upfront once your offer to purchase a home is accepted. Usually it is between 10-20% of the total cost of the property. Without one, your chances of having a 100% home loan approved is one in four, say some sources.
Providing a deposit, especially for first time home buyers is a strong indication to the seller and a home loan provider that you are making a financial commitment to follow through on your intention to buy the property, and has many advantages:
- It improves the chances of having a home loan approved by a finance house.
- Indicates that you potentially have the ability to manage your finances well, and live within your means.
- Increases your chances of securing a lower interest rate, especially if your transactional account is with the same bank to which you are applying for a home loan.
- It lowers the total amount of interest you will pay over the term of your loan.
- Reduces your monthly instalment on the home loan.
- Your options on the size and type of home you want, improve.
- The less you need borrow, the more disposable income you will have.
- Improves your chances of securing the home if there are multiple interested parties in the property.
Who manages and receives the deposit?
The deposit is not directly paid to the seller. Instead it is paid to the conveyancing attorney who deposits it into an interest-bearing trust account until the property transfer and registration process is complete, after which it is transferred to the seller.
- The very first thing to do is check your credit score with one of the major credit tracking companies. Usually your first check is free, which will indicate to you if you have outstanding debt, and where you rate on a scale. Banks and finance houses also do these credit checks so it is important you determine your credit rating before applying for a home loan.
- Do a personal budget. This will allow you to determine how much you can save on a monthly basis, or where you need to curb spending. In some cases it is advisable to utilise a stop-order facility fixing an amount for transfer from your transactional account to a savings account.
- Examine your credit card balance and overdraft debt. Both loans are impacted by the interest rate. Paying a credit card to zero on a monthly basis helps to avoid paying the bank money for the loan. The sooner you reduce these financial burdens, the more money you will have to save for the deposit.
- Shop around for more affordable services that will lower your monthly service rates. This may include insurance, medical aid, internet providers, etc.
- Consider switching your banking services. The more accounts you have with one bank translates into increasing your negotiating power for a lower interest rate on any banking transactions.
- Encourage the whole family to make savings contributions. Children like to feel that they are involved in achieving a goal.
- Reduce costs on holidays. Find more affordable accommodation, plan well in advance to avoid the late booking rush.
- If using a car to travel to work, seek others in a similar position that may work close to you or in the same company. Sharing the costs of fuel and maintenance on your vehicle has great savings potential over time.
- Reduce electricity consumption by not leaving lights on, and switching off at the wall, any plugs that are not in use. This may be a trickle in savings, but it is savings nonetheless. The same for water: do not leave taps running while you brush your teeth, or waste unnecessarily. Both these savings potentials are also good for the environment.
- Bargain hunting can save enormous amounts on your purchases. This is made easier y shopping online upfront before making a decision. Loyalty programmes are also designed to save the consumer money, so avail of those offerings.
- Consider how much rent you are paying, and whether it is worth finding cheaper accommodation on a temporary basis while you save for the deposit.
Exercise discipline with your money and you may be pleasantly surprised how much you can save, and how quickly it can happen. Sacrifices may be necessary but you have to weigh this up against how important it is to purchase your dream home. It may be sooner than you think!