Is a deposit still needed when applying for a home loan and will it affect one’s chances of being approved?
When it comes to home-buying, nothing attracts the attention of the seller quite like a deposit. Putting down a deposit when signing an offer to purchase (OTP) is seen as a sign of commitment. A deposit – usually 10% of the cost of the property – indicates to both the bank and the seller that you are a serious buyer.
However, while deposits were once part and parcel of the home-buying process, the latest statistics released by ooba Group indicate that zero-deposit home loan approvals are on the rise. “During the first quarter of 2021, we successfully obtained home loan finance for 80,7% of our applicants – 61% of whom required a zero-deposit loan. Quarter one’s approval rate across first-time buyers who required a zero-deposit loan was 79,3%,” explains Rhys Dyer, CEO, ooba Group.
This raises an important question: is a deposit still needed to purchase a home? “It’s not that simple,” argues Dyer. “While this data speaks to the banks’ favourable lending criteria in recent years, a deposit remains the best way to guarantee approval of a home loan application. With a deposit, you’re proving to the banks that you can finance at least a portion of your home purchase, which makes your loan a lower risk and indicates your ability to make the monthly repayments,” he says. In addition to increasing the chances of your home loan being approved, Dyer says there are still many other reasons why a deposit will benefit you as the buyer, in both the short and long term.
Avoid taking short cuts
While it might be tempting to think that not paying a deposit upfront reduces the cost of purchasing a house, this short term saving will cost you more in the long run. Simply put, a deposit reduces the amount that you need to repay to the bank. “Smaller monthly repayments reduce the amount of interest that you need to pay on your home loan over the borrowing period, and this stands to benefit you in the long term,” says Dyer.
“The less you borrow, the less you have to pay off, and that’s a huge advantage when you do the maths. A deposit also gives you some leverage when negotiating a better interest rate, as you have proven yourself to be a lower risk.” An additional benefit of paying a deposit is that it will help you to stand out from the crowd when vying for your dream home. “We’re still very much in a buyers’ market and the competition is fierce, but if you find yourself in a multi-offer situation on a property and you pay a deposit, the seller is more likely to accept your offer over that of other prospective buyers,” he says.
Read the fine print
Dyer warns prospective buyers that they may not have a choice about whether they should pay a deposit. “An OTP on certain properties might specifically include a stipulation that the buyer pays a deposit and that failing to do this constitutes a breach of contract. This gives the seller the right to cancel the deal.”
Securing your deposit
After you’ve weighed up your options and have decided to pay a deposit, the next hurdle is about how best to secure it. With the majority of real estate transactions occurring online, opportunities for cybercrime are rife, leaving buyers vulnerable to losing their deposits. This type of crime commonly and easily occurs when email records between the agent, buyer, and the respective lawyers to whom the deposit is paid, are intercepted by a malicious third party. This is commonly known as phishing. “Unfortunately, these crimes can slip under the radar, because the buyer traditionally has little to no line of sight on the deposit after the money is paid.”
The general process is as follows:
- the deposit is declared in the OTP and must be paid upon acceptance.
- the deposit is placed in a trust and is hopefully kept safe until the property transfer and registration process is complete.
Dyer adds that most buyers mistakenly believe that they only have two options when it comes to who can manage the trust: the transferring attorney or the estate agent. The ooba Group gives buyers a third option to securely manage their deposits. The system of the Buyers Trust (a subsidiary of ooba Group) “has been designed with countless security measures to protect it against the cybercrime threats that attorneys and estate agencies fall victim too. Buyers Trust also gives you full visibility into your deposit at all times, in an account that is in your own name, so you’ll have 100% peace of mind regarding the safety of your deposit”.
Getting the most out of your deposit
For many buyers, the main motivator for paying a deposit when purchasing a house is the desire to save as much money as possible in the long term. Dyer says that Buyers Trust is structured with these savvy buyers in mind by delivering maximum return on investment.