First-Time Buyer in SA? Why a 10% deposit can save you over R160K
Image: RON AI
Simon* was no stranger to second-guessing himself, and at times, he really wondered if he was making progress in life.
As a junior account manager at a marketing agency, he was making a reasonably good salary for a 28-year-old. Not thriving, not rolling in it, but theoretically skirting within the boundaries of middle-class life.
But often it just didn't feel like it.
He lived in shared accommodation with two other people. When his girlfriend slept over on weekends, she complained about having to share a bathroom with other housemates. She also wasn't a fan of his silver 12-year-old Toyota Yaris with a massive gash across the back bumper.
Many of his friends rented their own townhouses, often impeccably furnished, and with the obligatory big screen TV for Saturday's rugby game. One of his friends, at a similar earning level, bought himself a brand new Polo GTI, right out the box.
But when Simon looked at his investment account balance, a gentle smile lit up his face. Living below his means, and strictly managing his cash flow, was allowing him to save between 30% and 40% of his net income, depending on each month's unexpected expenses.
He'd been saving at a significant level since the age of 26, and not too long after his 30th birthday, Simon bought his first house. He did this with a 30% deposit, drastically reducing his interest rate and setting himself up to be debt-free sooner than expected. He also traded up to a partner who didn't judge his trusty old ride.
There are numerous examples of South Africans who made the necessary sacrifices to save up for their home loan deposit.
Although many first-time home owners opt for a zero deposit option, this will lead to significantly higher interest rate payments over the long term.
Let's look at a simple example. If you buy a R1 million home with a 100% deposit, at 11.75% interest over 20 years, your monthly instalment will be R10,837, and the total interest paid over the term will amount to R1,6 million, according to FNB. But put down a 10% deposit of R100,000 and you're looking at a lower monthly payment of R9,753, and the total interest amount is reduced to R1.44 million.
That's a saving of around R160,000 in interest over the 20-year period, and you stand to save far more than that by putting down a 20% or 30% deposit.
'Putting down a deposit signals that you're financially ready. It reduces the loan amount you need, lowers your monthly repayments, and increases your chance of approval. It also shows that you've built the habits needed to manage your long-term financial commitments,' says Sfiso Mahlangu, structured lending product manager at FNB Home.
But how do you save for that all-important deposit?
Farzana Botha, senior communications manager at Sanlam Risk and Savings, said she and her husband made several sacrifices while saving for their first home deposit.
These included downsizing their car to reduce repayments and selling household items that were no longer needed, while her husband also took on side jobs to generate additional income.
'These sacrifices were tough but worthwhile – having a deposit gave us access to better finance options and made our dream of homeownership possible,' Botha enthused.
She says living below your means is one of the smartest ways to reach your dream of owning a home faster.
'It starts with being intentional about how you spend and save. Work out how much you'll need for a deposit and set a monthly savings target. Automate that amount as soon as you're paid so it becomes a priority rather than an afterthought.'
She recommends tracking every cent of your income and expenses, and making lifestyle tweaks where possible. This could mean cutting back on things like entertainment, takeaways and subscriptions. Even small changes like cooking at home and sharing streaming services can free up hundreds each month, she adds.
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It's well worth saving up for a bigger deposit if you can.
Image: RON AI
Luke Davis-Ferguson, financial planner at Fiscal Private Client Services, advises South Africans to resist the urge to upgrade their lifestyle after receiving a raise or bonus.
'Consider moving in with family, getting a roommate or relocating to a more affordable area temporarily. Selling unused items can also give your savings a quick boost.'
His firm recently helped a couple create a monthly surplus of nearly R5,000, simply by reducing discretionary spending on eating out, subscriptions, and impulse purchases.
Be aggressive with your savings strategy
Luke Davis-Ferguson says the first step is understanding exactly where your money is going. He recommends downloading bank statements from the past three to six months and reviewing every line item.
Tools such as Discovery Bank's Vitality Money Financial Analyser or FNB's Money Savings Goals can be used to create a detailed and customised monthly budget.
Davis-Ferguson says the 50/30/20 rule is generally used as a starting point for budgeting. This means 50% for needs such as rent, groceries, transport and medical aid, 30% for wants like entertainment and eating out and 20% for savings and debt repayment.
However, if your goal is to save for a deposit, this ratio needs adjusting. Consider trimming wants to 10% and boosting savings to 40%.
Ester Ochse, product head at FNB Integrated Advice, recommends a 'pay yourself first' approach to savings, in which you automate your banking and move a set percentage of your income into a separate savings account.
Ester Ochse, product head at FNB Integrated Advice.
Image: Supplied
'This removes the guesswork and the temptation to use what's meant for your future on short-term wants,' Ochse said. She recommends the 80:20 rule, with at least 20% of one's income being directed to savings, or more if possible.
Furthermore, it's vital that you set a clear savings goal with a clear timeline, says Tando Ngibe, senior manager at Budget Insurance.
'Break it down monthly so it feels achievable. Then automate your savings through your bank so it becomes a habit, not a decision.
'Remember, living below your means isn't about depriving yourself. It's about being intentional with your money so you can build the future you want,' Ngibe added.
Tackle your debt first
Before ramping up your savings, it's crucial to tackle any high-interest debt, especially from credit cards, clothing accounts or personal loans, Davis-Ferguson says.
'These debts often carry interest rates that far exceed what you could earn in a savings account, meaning they erode your financial progress,' he adds.
'Start by listing all your debts, including balances, minimum payments, and interest rates. Focus on paying off the highest-interest debts first (the avalanche method), or if you need quick wins to stay motivated, start with the smallest balances (the snowball method).
'Once you have cleared your high-interest debt, redirect those monthly repayments into your savings,' Davis-Ferguson concludes.
It's important to estimate what your monthly costs will be after purchasing your first home, Discovery Bank's head of technical marketing, David Leibowitz advises.
This means adding up the estimates of your monthly home loan, as well as municipal rates, utilities, levies (if you're in a complex), home insurance and future property repairs and maintenance.
Bond registration and property transfer costs also need to be budgeted for in advance.
Why you should put extra money into your bond
If you've budgeted correctly and there is still a bit of money left over at the end of each month, it makes a great deal of sense to put this into your bond.
Simon, who we mentioned earlier, is already looking forward to paying off his bond sooner and saving a great deal on interest by employing this trick.
But how much can realistically be saved?
According to FNB, paying an additional R500 into your 20-year bond on a R1 million property, using the aforementioned example, will save you R335,000 in interest and shorten your loan period by three years.
Whichever strategy you follow, it is important to approach your savings with a goals-based approach, says Nicola Langridge, wealth manager at Private Client Holdings.
'Starting a new exercise regime has always been hard for me when I am not clear on what the goal is. I am far more committed when I have entered a 21km race or booked a hiking trip that requires preparation and has a clear deadline. Saving for your financial future follows the same principle,' Langridge says.
But life does not happen in a straight line, so regular reviews and adjustments are essential as circumstances evolve, she adds.
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