MAIN IMAGE: Jackie Smith, Head of Buyers Trust
Buyers Trust
Recent statistics indicate South African home buyers are putting down bigger deposits than ever. This statement is underpinned by ooba Home Loan’s latest data (Q4 ’23), which highlights a 23.7% year-on-year increase in the average deposit paid by first-time home buyers.
While young buyers prioritising deposits is a positive trend, recent anecdotal evidence from the FNB Property Barometer reveals that some home buyers are taking drastic measures to fund their deposits by taking out a personal loan.
“According to FNB, around 5% of home buyers are taking out personal loans to increase their chances of securing a home loan,” shares Jackie Smith, head of Buyers Trust, a cutting-edge bank-hosted deposit solution for home buyers.
“Some home buyers believe that the drawbacks of taking out a personal loan, which are usually charged at a rate well above prime, are outweighed by the long-term financial benefits of being able to put down a sizeable deposit on a property,” she adds.
The largest financial benefit of having a deposit is that it puts you in a better position to negotiate a lower interest rate from the banks. This reduces your monthly repayments and allows you to repay your home loan faster.
“However, while I am a massive proponent for deposits, I certainly do not advocate for taking out a personal loan to fund a home deposit,” Smith says.
The disadvantages of using a personal loan to fund a deposit
Home buyers who take out personal loans to fund their deposits engage in unsecured lending, which doesn’t require any collateral and is instead granted based on the borrower’s creditworthiness, as judged by the lender.
“But while you need a good credit score to be approved for a personal loan, even just applying for one can negatively impact your credit score – which will, in turn, impact your likelihood of being approved for a home loan,” Smith explains.
“Many consumers are unaware that when you apply for a loan, a lender will perform a ‘hard search’, an official enquiry on your credit report. Having more than one ‘hard search’ in 12 months will cause your credit score to dip because it indicates to lenders an over-reliance on credit, even if you don’t end up following through on the personal loan.”
She shares that if your credit profile has declined in recent months because of credit enquiries or taking on additional debt, a bank may withdraw their home loan offer due to affordability concerns. “As you have not proven your ability to save for a deposit, they could be concerned about your ability to repay simultaneous monthly instalments on a personal and home loan.”
Bank approval rates for 100% home loans remain elevated
Considering the disadvantages of using a personal loan to fund a deposit, recent shifts in bank lending behaviour also reveal that while having a deposit is an advantage, it is not necessary to secure a home loan.
ooba Home Loan statistics show that while bank approval rates for zero-deposit loans have dipped slightly in the most recent quarter, their 100% home loan customers have still achieved an average approval rate of 82.3%. This indicates the banks’ willingness to continue lending at high loan-to-value levels despite these customers failing to put down a deposit.
However, Smith cautions buyers to consider their affordability carefully before rushing to take advantage of high bank approval levels for zero-deposit loans. “Zero-deposit home loans are generally charged at a higher interest rate and will take significantly longer to pay off. I would advise prospective homeowners to delay their buying plans for a year or two to give them enough time to save for a deposit organically rather than taking out a personal loan or zero-deposit bond.”
She concludes by saying that once prospective home buyers have worked hard to save for a deposit, they can maximise their financial returns by entrusting it to the secure Buyers Trust platform. “Buyers Trust operates as a free bank guarantee – which would otherwise be a significant cost for the buyer – until the property transfer is complete. It also offers buyers a competitive investment return and full transparency on all interest accrued.”