I’m sure you have heard the advice before, and if you’ve yet to hear it, you can be guaranteed that the words “The sooner you can get into the property market, the better” will echo through your eardrums before you reach the age of 35. But, is it wise to take out a 100% bond just to enter the property market sooner rather than later?
For the year ending 31 March 2018, 42,76% of all home loans registered through BetterBond were calculated at 100% of the purchase price (that is, bonds without a deposit). It seems that financial institutions are increasingly willing to grant these sorts of home loans – and, it is not difficult to understand why. Banks can justify charging a higher interest rate on 100% bonds because the risk carried by the bank on these bonds is higher than on a bond with a deposit. Buyers who pay a deposit prove their financial stability and lower the total lending amount which therefore increases banks’ flexibility when it comes to negotiating a lower interest rate on the bond.
Our advice to anyone considering this option is to seek professional financial advice from somebody who can help you decide whether or not you can afford the implications of a 100% bond.
Consider Compound Interest
Before opting for this option, contemplate the power of compound interest on a home loan. For example, at the end of the 20 year lending period, you will spend just under R50,000 more in interest alone on a R1 million bond if you purchase without a deposit. Still, in today’s tough economic climate, saving R50,000 over 20 years seems to be a relatively small price to pay when considering how long it might take you to save up for R100,000 deposit, keeping in mind that you will need to budget for an extra R40,000 or so on top of that amount to pay for transfer duties, bond registration costs and other related fees.
Benefits of an Access Bond
Consider the option of saving towards a deposit, and then redirecting that money into the monthly repayments on a 100% access bond. This way, you don’t need a full 10% of the purchase price saved before you buy. Also, if ever you run into financial trouble, or need the money to do renovations on the home, you can access the money from your bond – an option that would not be as easily available to you if you take out a fixed bond with a deposit.
Should you do it?
The truth is that, while it is advisable to have a sizable deposit saved when applying for a home loan, each of the finance options will end up suiting the needs of certain buyers better than others. For example, taking out a 100% bond is best suited to you if you want to enter the property market sooner than if you had waited to save for a deposit. It is up to you to weigh up the pros and cons of each option carefully, seek professional advice, and then decide which solution works best for your needs.