How to (still) buy a home with a 10% deposit
The days of the 10% home deposit are gone, with mortgage originator, BetterLife Home Loans, last month reporting that the big commercial banks have all raised their lending criteria. Borrowers in the R250,000 to R1,5m price band now have to put down anything between 12.3% and 22.2% of the purchase price, on average.
This means that first-time buyers in the price bands between R300,000 and R1,5m need to have saved up between R36,900 and R333,000 before a bank would even consider their application. This excludes the cash needed for bond costs (R10,200 to R24,900) and transfer fees (R10,700 to R55,300), as well as opening the municipal account.
In total, a first-time buyer would need between R57,800 and R413,200 to qualify and pay for their first home.
The average age of the first-time buyer in South Africa is 34 years old, according to Ewald Kellerman, Absa Home Loans’ head of customer interaction, who says that this age quotient rises in tough economic times. Absa’s own House Price Index for June 2016 shows the average price of homes in the small (80m² to 140m²) and medium (141m² to 220m²) size categories is between R933,000 and R1,289m. This pushes buyers in the deposit requirement camps of 18.7% and 22.2%.
But there is a way for qualifying first-time buyers to secure a bond on a new home, only requiring a 10% deposit – significantly lowering their barriers to entry.
This is thanks to an Absa financial product called the Family Springboard. Launched in late 2014, the concept is a British one which won best new mortgage product in the UK, and sees parents or other helpers providing collateral for 10% of the purchase price.
“Parents really want to give their children the best start in life, but either don’t want to release cash from interest-earning investments to help their children with a deposit, or don’t want to commit themselves to providing surety for a 20-year loan,” says Jacques du Toit, property analyst at Absa Home Loans. “Our stats show us that the majority of first-time buyers are in their 30s before they purchase their first home. They’ve, therefore, lost many years of growing their wealth through their properties, and the benefit this could have had in their lives.”
The Family Springboard enables parents, or any other helper, to use their existing savings as collateral for the first-time buyer’s home loan, instead of paying away a deposit. Through this method, the helper’s savings continue to grow in a Fixed Deposit account in their own name.
“The helper’s Fixed Deposit remains as collateral until the loan reaches 90% of the value of the property,” says du Toit. “For an apartment or smaller home, with good growth in the property value, 90% could be achieved within three or four years.”
Absa’s House Price Index for June 2016 illustrates that small home prices (80m² to 140m²) are growing at 8.9% year-on-year, nationally.
“This will differ from area to area,” says du Toit, noting that customers can ask for a revaluation of the property so that if 90% of the loan is achieved, the collateral is released. “At this point, the first-time buyer continues to pay off the home loan as they have been doing, and the helper can choose to either leave the Fixed Deposit to earn interest as is, or place it in a different investment.”
Aimed at the first-time buying market, a house price cap of R1,5m applies to the product, according to Kellerman.
“It happens often when a child tells their dad, ‘I want to buy a new property but don’t have a deposit. You’ve got the money in your pension or you could take out a second bond.’
“We’ve seen this many times in all income segments. The problem arises when the parent needs this money again, isn’t sure how much interest to ask (if any at all), or if the child should pay back in monthly instalments.”
In cases when a parent or guardian lends money to a child for a home deposit, many things can go wrong during the tenure of the 20-year loan: relations can become strained if the child absconds from paying their parents back on a regular basis, or, worse, if the child is financially unable to service the bond due to retrenchment or other causes. This will mean the parent standing surety becomes liable for the outstanding bond amounts (while still being out of pocket after lending towards the deposit).
Absa’s Springboard is, however, not without its risks: a portion of the helpers’ collateral security can be retained by the bank if the property is repossessed and sold, and if there’s a shortfall between the sale price and the amount remaining in the home loan account.
The Absa model not only formalises the lending practice between first-time home buyers and their parents or helpers, but it also minimises the risk to the helper. With the cost to purchase property seemingly rising year-on-year, and first-time buyers being unable to effectively save for large deposits, this is one lower-risk way parents and helpers can assist their children to enter the property market.
To find out more and to apply for a Family Springboard loan, click here