The latest interest rate hike

BY BONNY FOURIE bronwyn.fourie@inl.co.za

This is how much you will have to cough up on your monthly bond repayments

HOMEOWNERS, and those still hoping to step on to the property ladder, will have to cut back on their spending in order to keep up with their bond repayments.

This is because the banks’ repo rate, as expected, was hiked by 25 basis points last week to 4.25%, which means the prime lending rate is now 7.75%.

Although this increase might only add a few hundred rand to some homeowners’ monthly bond repayments, those hundreds could add up to thousands over the next year, and the reality is that the hikes are likely to continue over the coming months.

BetterBond calculations show with the previous prime lending rate of 7.5%, the monthly repayment on a R1 million home – taken over a 20-year period – was R8 056, but now these homeowners will be paying R8 209 a month – R153 more. And, of course, the more expensive the home is, the more you will pay.

If your home cost R2m, you would have paid R16 112 last month. From now, though, until the next interest rate decision, you will be paying R16 419 (R307 more).

And if you are the owner of a R3m home, your monthly bond repayment will climb from R24 168 to R24 628 (R460 more).

Similarly, BetterBond reveals, monthly bond repayments on these home prices will see higher rises:

• R4m bond repayment will increase from R32 224 to R32 838 (R614 more)

• R5m bond repayment will increase from R40 280 to R41 047 (R767 more)

• R6m bond repayment will increase from R48 336 to R49 257 (R921 more)

Yet although the rise in the prime lending rate will affect monthly bond payments, BetterBond chief executive Carl Coetzee says the increases forecast by the South African Reserve Bank for the next three years are “gradual” and the prime lending rate “should only hit double digits in 2024”.

“This means that there is still time to make the most of the accommodative lending environment,” he says.

Just Property chief executive Paul Stevens suggests home loan holders use a repayment calculator to see how their payments are likely to change and then prepare for increases.

“Bond repayment calculators can help you understand the effects of increases in interest rates on your affordability.”

And, with interest rates likely to rise over the next few years, homeowners who haven’t looked over their bond commitments should do so, advise both Stevens and Coetzee.

Should I fix my home loan interest rate to shield me from rates increases?

IN THE light of the expected increases in home loan interest rates, many homeowners are wondering whether to fix their interest rates now to avoid further increases.

If you are one of them, you need to understand what this choice entails and the impact it can have on your home loan repayments over an extended period.

Carl Coetzee, chief executive of bond originator BetterBond, says home loans are awarded, by default, on the basis of a variable interest rate.

“Only once your bond has been registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses.”

However, while market conditions are a useful guide, he says “the most important factor when deciding on whether to fix the interest rate or not should be affordability”.

Paul Stevens, chief executive of Just Property, notes that, right now, a fixed interest rate will “almost certainly be higher” than a variable rate, so you should rather get indicative proposals from the lending institutions.

“If you are applying for a bond, comparing fixed versus variable interest rate options is a worthwhile exercise. From there, you can apply the options to your appetite for risk/ uncertainty and future prospects.”

Coetzee agrees: “Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time.”

Stevens says interest rates are expected to rise gradually to 2024, with industry predictions suggesting three or four hikes this year, possibly by as much as 5%.

“The repo rate expected to return to its pre-pandemic (end-2019) level of 6.50% by the close of 2024.”

Berry Everitt, chief executive of the Chas Everitt International Property Group, says homeowners and prospective buyers must also be aware that most banks will charge borrowers a premium to fix the interest rate on their bond – and will also usually only fix a rate for a minimum of two years.

For example, if this premium is 2%, then anyone who is currently being charged an interest rate of 7.75% on their home loan would have to pay at least 9.75% for the next two years if they switch to a fixed rate option.

The effect of this premium would be to increase the minimum monthly repayment on a home loan, which would be money wasted unless the variable rate applicable to that home loan also rose to 9.75%.

However, if you could afford the additional amount, and you instead were to use it to reduce the capital portion of your bond while staying on a variable interest rate, Everitt says amortisation tables show you would stand to lower the total balance outstanding.

“This means that, if and when interest rates do start to rise again, your minimum monthly bond repayment will be calculated on a much lower capital balance.”

If you’re still unsure, Rhys Dyer, chief executive of the ooba Group, gives a quick rundown of the pros and cons of each approach.

VARIABLE INTEREST RATE

Pro: If the prime interest rate goes down in response to market forces, the interest on your home loan goes down with it, and you save money.

Con: On the other hand, if the prime interest rate goes up, so do your repayments. The fluctuating interest rates can make it difficult to budget accordingly.

FIXED INTEREST RATE

Pro: You keep paying the same home loan repayment amount monthly, regardless of fluctuations in the market, for an initial agreed period. You will thus be able to factor your repayments into your budget with 100% accuracy.

Con: A fixed interest rate may be less of a risk for you, but it’s more of a risk for the bank, so they’re likely to charge you a higher rate.

Con: Fixed interest rates expire after the initial agreed period, after which you will either have to revert to variable interest rates or negotiate a new fixed rate with the bank.

Con: The option of a fixed interest rate for the initial agreed period is only offered after bond registration, so you cannot factor this into your planning upfront.

HOMEOWNERS will need to do their sums and tighten their belts to keep up with bond repayments. PICTURE: ANDREW NEEL/PEXELS