As a potential homebuyer, seeing the ‘upside’ of interest rate increases may seem like an impossible prospect, but the same rate hike that increases the money you owe also increases the money in your savings account.

“This same rule applies to home loan deposits invested in an interest-bearing account,” says Jackie Smith, Head of Buyers Trust (a subsidiary of ooba Group) - a safe and secure bank-hosted deposit solution for homebuyers. 

While deposits on home loans remained low priority for many during the COVID-19 pandemic, the latest statistics from ooba Group’s Q3 ’22 oobarometer indicate that an increasing number of South Africans are recognising that they can use deposits and earned interest to their advantage, with the year-on-year growth of the average deposit size (as a percentage of the purchase price) up a whopping 18.2%.

How much interest will your deposit earn?

In an effort to illustrate the beneficial impact of interest rate hikes for homeowners who have put down a deposit, Smith compares the possible interest accrued of various deposit amounts against the current interest rate (9.75%) and the interest rate of November 2021 (7.25%).

“The Q3 22’ oobarometer revealed that the average national purchase price of a home is R1 402 408 and that the average deposit is R127 567 (constituting 9.1% of the purchase price) so these figures will be used as a starting point to give a realistic representation of the possible earnings of homeowners who choose to put down a deposit,” she explains.

Table Illustrating the Deposit Interest Accrued at the Historical Interest Rate of 7.25%

Table Illustrating the Deposit Interest Accrued at the Current Interest Rate of 9.75%

“These possible earnings are calculated on the average length of time it takes for a property to transfer, with three months being a relatively short time to see maximum earnings,” explains Smith. “However, in instances where there are delays in the process or when buying off-plan, a deposit can accrue interest for up to two years until the transfer is complete.” 

Smith emphasises that every rand counts in this challenging economy and that the higher the deposit amount, the higher the potential earnings. “Put your earned interest aside to add to your monthly repayments once the transfer is complete – this will help you to pay off your bond sooner.”

Tips for maximising deposit returns

Homeowners wanting to maximise the earnings on their deposit should consider the costs involved in managing it – especially when the deposit is paid to a transferring attorney.

“Homebuyers are legally mandated to pay 5% of the total interest accrued to the Legal Practitioners Fidelity Fund and are also required to pay for the ‘hidden’ administrative costs of a deposit such as the price of a Bank Guarantee and getting FICA’d. The buyers has zero transparency of their money as their deposit is held in the seller’s conveyancer’s name,” Smith explains

The second option for managing your deposit – paying it over to an estate agent – does not include the transferring attorney’s requirement to pay over 5% of the total interest. But many estate agents no longer offer this service following the change to the Property Practitioners Act earlier this year.

Buyers Trust is a third-party option that looks to maximise deposit returns by including all administrative costs in its minimal admin fee, which is 1% of interest accrued. Opening the account in the buyer’s name gives the buyer more transparency over their deposit investment until the transfer process is complete.

“Buyers Trust is designed to reward fiscally savvy homebuyers for their decision to put down a deposit, as this decision demonstrates discipline and long-term thinking,” says Smith. 

“We encourage buyers to put these interest earnings to good use by offsetting them against recovering some transfer costs or they can be recycled back by paying it into paying off a home loan,” she concludes.