Einstein said: “Compound interest is the eighth wonder of the world.  He who understands it, earns it… he who doesn’t… pays it.”

And the harsh reality today is that more people are paying it, rather than earning it.  Most people underestimate the importance and power of a deposit when purchasing a property, and in this article, we would like to highlight just some of the advantages of having that extra buying power!

Saving on interest

With regards to power of compounded interest, have a look at this example:

Property Purchase Price:  R1 000 000

Interest Rate:  10.25%

Term:  20 Years

At the end of the term, you would have repaid the bank R2 355 944, that is a whopping R1 355 944 in interest paid!

Now consider this:

Property Purchase Price:  R1 000 000

Deposit (10%):  R100 000

Interest Rate: 10.25%

Term: 20 Years

At the end of the term, you would have repaid the bank R2 120 349, meaning an interest portion of R1 120 349.

That means by putting down an R100 000 deposit, you have saved R235 595 in interest over the 20 year period!!

Getting a better deal

When applying for finance on your new property, the Banks will look favorably upon your application when you have a deposit to put down.  Putting down a deposit reduces the amount applied for, increasing your chances of a successful finance application.  If you look at our finance example of the Property Buying Tip #10, you can deduce that by having a deposit that reduces the amount you apply for, you will be able to purchase a more expensive property.

Having a deposit will also improve the interest rate offer the bank will make you, meaning you will have a double benefit from your deposit:  Saving from both a lower interest rate and saving through the power of compounded interest.

Example:

Property Purchase Price:  R1 000 000

Interest Rate:  10.25%

Term:  20 Years

Total Interest Paid:  R1 355 944

 

Property Purchase Price:  R1 000 000

Interest Rate:  10%

Term:  20 Years

Total Interest Paid:  R1 316 051

This shows that a 0.25% difference in interest rate can translate into an R39 893 saving over the term of your bond finance.

The discipline of saving

Getting into the habit of saving on a monthly basis can be hard, but the reward of such discipline can be extremely rewarding.  Saving up for a deposit on a house can sometimes feel frustrating, but if you look at your financial well-being in the future, the benefit of having a deposit when it comes to buying a property will greatly outweigh the sacrifice.

Once you are in the habit of saving for a deposit, don’t stop once you have purchased your property!  Saving additional capital on a monthly basis can have a large impact on your bond.

By paying an additional amount (albeit a lump sum or monthly) on your bond repayments, you will significantly reduce the amount of interest you will pay as well as the term of repayment.

Example:

Property Purchase Price:  R1 000 000

Interest Rate:  10.25%

Term:  20 Years

Total Interest Paid:  R1 355 944

By paying an additional R1 000 per month over and above the repayment of R9 816, your final figures will look like this:

Property Purchase Price:  R1 000 000

Interest Rate:  10.25%

Term:  15.28 Years

Total Interest Paid:  R982 961

Interest Saving:  R372 983

Time Saved:  4 Years

That is a massive reward in interest save if you can continue with the discipline of saving additional money every month!

These examples listed above are undeniable evidence that having a deposit when buying a property has enormous benefits and will greatly improve your financial position over the period of the loan.  There are also huge advantages to saving additional money and paying more than your required bond repayments.

 

*Although every effort was made to ensure the accuracy of our calculation, Foce Property Investments and its subsidiaries accept no liability in respect to 
any errors contained herein.  Under no circumstances will Foce Property Investments be liable for any loss or damage arising from these examples.

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