Thinking of buying a house? Start saving for a deposit.

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5 June 2019

For many South Africans purchasing a home is the biggest financial decision that they will ever make in their lifetime.

Financing the purchase through a loan from a bank is the only way most South Africans can buy a house. But prospective buyers should be aware of the impact a deposit will have and the enormous amount of money they can save on interest payments over the term of the loan.


An example

To illustrate the impact of saving for and paying a deposit, let’s look at the example of Reshma and Joe:

Reshma recently bought a small, one-bedroom apartment. She is a savvy saver and saved enough over the last couple of years to be able to pay a 10% cash deposit on the purchase price. By saving for a deposit Reshma saves almost R180 000 in interest payments over the term of the loan.

Joe bought a similar apartment for the same price, but didn’t save and couldn’t pay a deposit.

Let's explore the difference in what they end up paying over the term of the loan:

Joe - No deposit

Purchase price

Interest rate*

Deposit paid

Term

Monthly repayment 

Total repayment

Total interest paid

R750 000

10.25

0%

20 years

R7 362

R1 766 958

R1 016 958

 

Reshma - 10% cash deposit

Purchase Price

Interest rate*

Deposit paid

Term

Monthly repayment

Total repayment

Total interest paid

R750 000

10.25

10%-R75 000

20 years

R6 626

R1 590 262

R840 262

From the above comparisons you will see that Joe pays R736 more per month than Reshma. Over the 20 years he pays a total of R1 766 958, or R176 696 more in interest, than Reshma. 

The impact of a deposit

Besides the obvious difference in what you end up paying, having (or not having) a deposit can also impact your life in the following ways:

  • Large amounts of debt can hinder your financial ability to obtain more loans in future, e.g. you may not be able to purchase a car on credit.
  • Lower monthly repayments may decrease your stress levels.
  • You will have more disposable income at hand which may enable you to pay for unforeseen costs or save towards another goal.
  • You may earn a higher return value should you choose to sell your home in the future.
  • You will be better equipped to handle increases in levies, property rates and utility bills as these costs tend to increase annually.
  • You will have a better chance of obtaining a home loan if you have a deposit to put down.

Reshma’s example shows that saving for a deposit on a house saves you a substantial amount of money over the long term.

Other costs involved in buying a house

Prospective home buyers should be aware of all the costs involved that must be paid over and above the deposit. These include transfer duty, bond initiation and registration fees, legal costs and administration fees.

A rule of thumb is that these costs could be in the region of 8% of the purchase price. We recommend that you include these costs when putting money away towards your goal of saving for your deposit.

Calculate the cost of transfer duty

Property value

Transfer duty payable

Less than R900 000

No transfer duty payable

R900 000 to R1 250 000

3% of the value of exceeding R900 000

R1 250 001 to R1 750 000

R10 500 + 6% of value more than R1250 000

R1 750 0001 to R2 250 000

R40 500 + 8% of value more than R1 750 000

R2 250 001 to R10 000 000

R80 500 + 11% of the value more than R 2 250 000

R10 000 001 and above

R933 000 + 13% of the value more than R10 000 000

*All amounts and interest rates used in our examples are for illustrative purposes only. The table above is based on the 2018 (1 March 2017 – 28 February 2017) transfer duty figures. 

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