The difference a deposit makes on a home loan

In some circles, a 100% home loan is considered the unicorn of financial deals, because not everybody gets a home loan that covers the full purchase price of their dream house. But rather than complaining about not being able to get a 100% home loan, here are 4 reasons why it makes sense to save up for a deposit anyway.


1. Your monthly instalment will be lower

A sizeable deposit is an advantage, as it reduces the size of the home loan you need. The less money you need to borrow, the lower your monthly instalments will be. More affordable payments also make it easier to qualify for a home loan.

What’s a sizeable deposit, you may ask? Anything from 10% and above is considered a decent deposit. A R100,000 deposit on a property costing R1 million will certainly have a positive impact on your monthly instalment. For example, if you get a 100% home loan at 7.25% over 20 years, your monthly instalment would be just over R7,900. But your 10% deposit lowers your home loan amount to R900,000, which will cost just over R7,100 a month – a saving of more than R9,000 a year.

You could save another R400 a month if you put down a 15% deposit, and a further R400 a month with a 20% deposit – saving you more than R18,600 a year in total. If keeping your monthly expenses lower is important for your peace of mind, then saving for a sizeable deposit first is your route to home ownership with affordable payments.


2. You’ll have more options

Saving for a deposit could also lift you into a price bracket that you’d otherwise not be able to afford. Let’s say you qualify for a R1 million home loan, which means you’d need an income of around R26,000 a month. You could make sure you qualify for this amount by applying for preapproval. But if you have a R100,000 deposit, you can shop for homes closer to R1.1 million without having to stretch your finances.


Saving for a deposit is a lot easier once you look at these numbers and see the difference that a deposit can make


Bear in mind that at 7.25%, your instalments on a R1 million home loan will be just over R7,900 a month. So, it depends on your circumstances – can you afford that comfortably, or does it make more sense to get a R900,000 home loan on a R1 million house instead, so that you can save on your instalments? If you don’t foresee a need to cut your expenses, a deposit could help you buy a better home than you would otherwise be able to afford. Either way, a deposit gives you more options.


3. You’ll save on interest

A deposit lowers the total amount of interest that you pay over the term of your loan. Using our example of a R1 million home loan paid over 20 years at an interest rate of 7.25%, you can cut your total interest payments from around R897,000 to R807,000 if you put down a 10% deposit.

Those savings climb to almost R135,000 with a 15% deposit, and more than R180,000 with a 20% deposit.


4. You’ll have negotiating power

Another way you can pay less on your home loan is to have or switch your primary transactional account to Nedbank. If your main bank account is with Nedbank, you may be eligible for a preferential interest rate on your home loan, which will reduce both your monthly instalments and the total amount of interest that you pay.

On a R1 million home loan, you’d pay R300 a month less with an interest rate of 6.75%, instead of the 7.25% used in our previous examples. This lowers your monthly instalment to just over R7,600, saving you more than R70,000 in interest over 20 years.

Saving for a deposit is a lot easier once you start looking at these numbers and see the difference a deposit can make. Remember these benefits when saving for your deposit starts feeling like a sacrifice and your determination weakens; then keep saving.

Besides saving for a deposit for your home loan, you may want to consider saving towards bond and transfer costs too. Use our bond and transfer costs calculator to get an estimate of these upfront home ownership costs.