Need a deposit? Personal loans will bury you
92.5%. This is the average home loan amount South African banks are prepared to finance, according to numbers from BetterLife Home Loans. The bond originator, which rebranded from BetterBond in April this year, also reveals the average first-time home price is now R649,084.
While this price is exempt from transfer duties in the second-hand home market (the ceiling having risen to R750,000 following this year’s budget speech), other costs such as legal fees, deposits and possible occupational rent need to be paid.
With 7.5% on average not being financed by the bank, first-time buyers need to find over R48,000 to cover the home loan shortfall.
Absa’s managing executive of HomeLoans, Carel Grönum, says more than 50% of the bank’s monthly home loan applications don’t have deposits. “Successful approval of these applications would be determined by, but not be limited to, the customers’ ability to afford the higher instalment, proof of sustainable income, the risk profile of the customer and the quality of the asset being financed,” he says. “A small portion qualify for a 100% bond.”
Ooba CEO, Rhys Dyer, says approval rates of loans without deposits are on average 15% lower than the approval rate on a loan with a 20% or greater deposit.
Consumers therefore have two options available: saving up the equity over months or years, or applying for a short-term loan to the maximum amount of R150,000.
While banks themselves provide short-term credit to customers, as well as a range of other microlenders such as DirectAxis, how does this affect a bank’s risk assessment and do you need to mention the loan in the application process?
Albertus van Staden, FNB’s head of credit in the Housing Finance department, says there is no restriction against using a short-term loan to finance a deposit, but that customers will have to disclose this as it will affect their affordability.
A quick search reveals that on the maximum allowed amount of R150,000, consumers can expect to pay up to 32% in interest per annum (compounded monthly). Initiation fees are over R1,000 once off and service fees of around R60 a month apply. The loan will also have to be paid off within 72 months (six years).
On a R48,000 loan, at an interest rate of 26% per year, the final amount paid over six years is over R100,000. Consider this: if you borrow R48,000 and pay 26% interest per year, your monthly instalment will be R1,600 over 72 months (or R2,898 over 24 months).
Would a bank still grant a bond to a client if they raised the deposit or transfer fees from a short-term loan – considering the high cost to the consumer?
“If they could afford both, then yes,” says Van Staden. “But there are two angles on this: the short-term loan will amortise quicker (due to shorter term), although it may be at higher unsecured interest rates; and if the deposit and transfer fees are included [in the bond], repayment is over a much longer term typically where you end up paying more on interest.”
Long-term interest aside, one of the greatest challenges to consumers is their monthly ability to meet all their financial obligations while saving for retirement.
Let’s look at the loan repayment on the average first-time homebuyer’s bond of R649,084. According to Private Property’s repayment calculator, a borrower would pay a monthly instalment of R6,041 over 20 years at an interest rate of 9.5% if they did not put down any deposit but got a 100% bond.
Similarly, if they did put down 7.5% (R48,000), their instalment would drop to R5,594 per month.
The short-term loan of R48,000 would cost between R1,600 (72 months) to R2,898 (24 months) extra per month on top of the monthly R6,041 bond instalment.
It’s not a moot point: a deposit not only improves your chances of accessing finance, it will also save you between R2,047 and R3,348 per month for the first 24 to 72 months of homeownership.
“With regards to additional debt, we would advise people to carefully consider it to cover deposits and others costs when buying a new home, as this could significantly affect their affordability of the new property,” says Steven Barker, head of Home Loans at Standard Bank. “Customers are encouraged to develop a financial plan to assist with saving towards a deposit and not burden themselves with additional debt.”
Borrowers can approach their bank to request including the associated costs with the loan application, according to Grönum. “This is not guaranteed to succeed,” he says, noting that it will be better to save upfront to receive a better interest rate. “If you plan to take a short-term loan to pay for transfer fees, be aware that should this affect your affordability or risk to the bank, the bank may withdraw/cancel your home loan.
“The additional short-term loan may put your ability to repay your monthly expense obligations at serious risk or, even worse, be over indebted. Not only will this cause financial difficulties, but you could end up losing the house. It’s best is to stay within your means.”