Do I need a deposit to buy a house?

Whenever you sign an offer to purchase you will be asked to put down a deposit. This will range from a few thousand Rand to 20% of the property price depending on the seller and estate agent. The act of ‘putting down’ a deposit is purely an act of goodwill and is a show of commitment. There is no legally binding stipulation that you must pay a deposit.

When and to whom is the deposit paid?

The deposit is usually paid within a time period stipulated in the offer to purchase. This time period is up to you to negotiate with the estate agent, but the norm is two weeks from signature. Remember that this deposit does not go to the seller, it must be paid into the conveyancing attorney’s trust account. Some estate agents will ask you to pay it into their trust accounts, however I would advise against this as estate agents (even the large ones) have come into recent critisism for the management of their trust accounts. These trust accounts will be interest bearing, so if your deposit is going to be sitting there for a long time before transfer (for an off-plan unit for example) make sure you ask the attorney what the rate of interest is on the trust account so you know how much you will be earning on it.

Please be aware that all lenders are now requesting deposits on all mortgages regardless whether you are a first time homebuyer or not.

Does size matter?

Generally the larger the mortgage deposit (as a percentage of the value of your house) that you put down, the better the interest rate you can negotiate with the bank. This is because the lenders know that if you default on your loan and they repossess the property, there is more chance of them getting their money back on the sale of the property – hence less ‘risk’ to the lender. It also shows to the bank that your are investing your own hard earned cash into the property!

Therefore the larger the mortgage deposit you put down, the lower the rate of interest you are likely to get. A larger deposit also reduces the risk of you going into "negative equity". This is the situation when the value of your house falls to below that of your mortgage. This makes it difficult to sell your house because the proceeds won't cover the debt you owe and you would need to find additional funds from elsewhere.