A recent survey in the UK found that young adults are increasingly relying on their parents to help them pay for a deposit for their first home. The survey conducted by mortgage lender Halifax found that the majority of parents believed they would have to help their children with a deposit on a home while 27 percent had already dipped into their savings to help their children.
This is creating concerns in the UK about the effect on parents’ retirement plans and is also leading to children living with their parents for longer as they are unable to afford their own homes.
In South Africa we have a very different set of problems. Most young black home buyers cannot rely on their parents for financial support and are more often than not are their parents financially. This makes it increasingly difficult for young black South Africans to enter the property market.
The banks have found that in the affordable housing market – property between R400 000 and R700 000 – most people do not have enough savings to put down a deposit.
As a result many potential homeowners are tempted to take out personal loans at high interest rates to meet the deposit requirements. The first few years of homeownership are financially difficult at the best of times; those who have to repay an expensive short-term loan over and above their mortgage often find they cannot keep up, and the risk of default increases.
Deposits are still the best way to go
Although the bank may give you a 100% loan, you should start saving towards buying a home – not just for a deposit but also for the costs associated with buying a property. According to mortgage originator ooba, on a property of R600 000 you could expect to pay an additional R27 810 in transfer and bond registration costs.
In the Halifax survey most people between the ages of 20 to 45 did not have savings sufficient for a deposit on a home, yet 80% admitted to spending money they could otherwise be saving for a deposit. More than a third spent this money on eating out, followed by clothing and holidays.
Spending your potential deposit on non-essentials could cost you more than your realise. On a mortgage of R600 000, a 10% deposit (R60 000) could save you R130 000 over the lifetime of the bond and would reduce your monthly instalment by R500 a month
The good news is that the banks say they are starting to see more customers saving towards their new home. FNB says they are seeing a number of customers who previously were unable to take up a home loan, approach them again after a number of months, having saved the cash for the transfer fees and bond costs. Standard Bank says they are seeing encouraging results where customers are voluntarily paying in deposits which makes their instalment and interest more affordable.
For this reason banks are focusing on providing no-deposit home loans to the affordable housing market.
The Myhome product from Absa extends up to 100% loans to clients in the affordable market (earning up to R18 600 per month). Absa will consider extending 100% loans to customers with higher salaries depending on their creditworthiness.
Standard Bank has an offering called Jumpstart for first-time homebuyers. Both the bond costs and transfer costs are included into the loan which is subject to credit granting and qualifying criteria. The Loan To Value (LTV) tends to be more than 100% in this case, subject to affordability.
FNB offers 100% mortgage bonds to the affordable market under FNB Housing Finance. The value of the property needs to be between R400 000 and R600 000 and the applicant must be earning less than R25 000 per month to qualify.
Nedbank provides 100% loans to any of its customers based on the merit of the application and takes into consideration a number of credit criteria before granting a bond. Based on these criteria, the bank determines what percentage of the bond it will grant each individual client irrespective of income or property value.