Deposit interest rates and payouts explained

Inflation in South Africa rose to 5.9% in April 2022 and by the end of May, the Reserve Bank’s Monetary Policy Committee increased the repo rate by 100 base points to 4.75%. The current inflation rate is at 7.4% as of July, resulting in higher interest rates on bond repayments in the residential real estate sector.

Listen/read: Sanlam Investments’ Arthur Kamp and Alexforbes’ Isaah Mhlanga on Sarb’s rate hike impacts

Home buyers are strongly encouraged to put down deposits on their property purchases to decrease monthly bond repayments and to earn more favourable interest rates on their home loan.

While the banks continue to approve record-breaking numbers of zero-deposit home loans, committing to putting down a deposit will save homeowners a lot in the long run.

As an example of the savings achieved on a deposit, if a buyer purchases a R1 million home without a deposit, their monthly repayments will be R8 997 for a 20-year bond at an interest rate of 9% (the current prime interest rate). This amounts to R 2 159 342 in total for the 20-year period.

However, if a buyer puts down a 10% deposit (R100 000) on that same property, their monthly repayments will be R8 098 on a 20-year bond at an 9% interest rate. This amounts to R899 savings a month and R215 934 in total over 20 years, which can make a huge difference to a price-conscious buyer.

When and how is a deposit paid

A deposit on a home purchase is typically paid once your offer to purchase (OTP) has been accepted. The first thing to know is that you don’t pay the deposit directly to the home seller. It’s put in an account and kept safe until the property transfer and registration process is complete.

This amount is usually around 10% of the property purchase price and is often paid to the estate agent or transferring attorney. However, there are an increasing number of phishing scams going around and this places your hard-earned deposit under threat.

Real estate transactions are at high risk of cybercrimes, particularly phishing scams, a trend that is spiking due to an increase in online communications, work from home policies and weak software security systems.

In addition, estate agents and transferring attorneys may be less inclined to invest the deposit in an account that earns the maximum amount of interest during the period, which would benefit the buyer but is not a necessary requirement of their mandate.

Like any investment, you want to ensure that your deposit is safe without any threat and in an interest-bearing account. This way, you receive all the interest accrued over the period (normally around three to four months).

Deposit pay-outs explained

Once the transfer process of the property is completed and the property is registered in the Deeds Office in the buyer’s name, the seller’s transferring attorney will request that the deposit amount (sans interest accrued) be paid to the seller.

Depending on which option a buyer has chosen to manage their deposit, this transfer will be the responsibility of the transferring attorney, estate agent or a third-party.

Following this, the full net interest earned on the account over the transfer period will be paid over to the buyer. The account is then closed, and the buyer takes ownership of the property.

Buyers must make sure that the party responsible for managing their deposit will offer them protection should the transaction fall through for reasons outside of their control. This includes cases where the buyer’s OTP is contingent on bond approval so that if their financing is not approved for whatever reason, they will receive a full refund on their deposit.

Jackie Smith is head of product at Buyer’s Trust.