Beware opting for a fixed interest rate

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

Experts in the property industry give advice on commonly asked questions

Q: IS IT bad to be a forever renter? I know property is a great investment but what other pros are there compared to renting?

A: The benefits of buying a home over renting one are: Reduced monthly repayments: If the interest rate goes down, so does your monthly home-loan repayment.

On the other hand, a rental agreement is generally fixed, so there is a chance that you are paying inflated rental prices at this stage. The power of owning an asset: Your property is likely to be an appreciating asset, especially over the long term, and it could even be used as an investment property in the future.

If the value of the property rises, the value of your personal wealth should also increase and you’re more likely to make a profit if you sell it. Take charge: Generally, you can do anything you like with the decor and outdoor areas (subject to council or body corporate approval) and any improvements are likely to enhance your lifestyle and increase the value of your home.

It’s recommended not to fall into the comfort zone of renting and for first-time buyers to take advantage of the current market conditions. Finally, if you intend to buy to let, the income from rent can be used to pay off your home loan. – Rhys Dyer, chief executive of ooba Group

Q: We want to sell our home in the next year or so but are not sure of the best time. How do we know when exactly we should put it on the market?

A: Unless there is a particular urgency to sell, first consider if the market conditions are favourable and second, take some time to decide what the next move will be once the home is sold.

The property market works in cycles. At times, the market will favour buyers and, at other times, the market will favour sellers. It is important to remember that while there is a market trend throughout the country, there will also be certain areas that buck the trend due to specific circumstances that influence that particular area.

Before listing the property, talk to a real estate professional who has working knowledge of their specific market.

Before rushing to put your home on the market, establish a plan in the event that the sale happens quickly. Before the home is listed, it is a good idea to know where you will go if you are in between homes. – Adrian Goslett, chief executive of Re/Max of Southern Africa

Q: What insurance policies will I need to take out when I buy a home?

A: When you buy a new home, the bank will usually insist that you obtain a home owners’ insurance policy to provide for the repair or replacement of the property in the event that it is damaged or destroyed by fire, flood, high wind, earthquake or other disaster.

Such policies often also provide insurance against less serious damage resulting from burst geysers, falling trees and collapsing garden walls.

Most lenders will be less insistent that you take out life insurance to cover the outstanding balance of your home loan and pay it off in the event of your death. But this cover, usually referred to as bond insurance, can make all the difference to your family at a difficult time by enabling them to stay on in a home that is fully paid off and so you should consider it very seriously.

In addition, you should think about whether you just want credit life insurance for the bond or whether you should take an additional normal life insurance policy. – Gerhard Kotzé, managing director of the RealNet estate agency group

Q: With the interest rates being so low, would it be better to fix my interest rate or not when taking out a home loan?

A: With interest rates still at their lowest levels in almost 50 years, more homeowners are weighing the pros and cons of asking their bank to convert their home loan from a variable interest rate to a fixed rate for the next few years. Their goal is obviously to keep their monthly bond repayment at the current levels even when inflation starts to rise again and the Reserve Bank responds by moving rates back up too. This is understandable.

However, most banks will charge borrowers a premium of at least 1.5% currently to fix the interest rate – and will also usually fix a rate for a minimum of two years. This means anyone who is currently being charged an interest rate of 7.25% on their home loan, for example, would have to pay at least 8.75% for the next two years if they switch to a fixedrate option.

The effect of this premium would be to increase the minimum monthly repayment on a R1 million home loan by R934 – which would be money totally wasted until or unless the variable rate applicable to that home loan also rose to 8.75%.

However, if you could afford the additional R934, and you were to use it instead to reduce the capital portion of your R1m bond, while staying on a variable interest rate, amortisation tables show that you would stand to lower the total balance outstanding from R1m to R965 000 within a year and to R928 000 within two years (compared to R952 000 without the extra payment).

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, and that even at 8.75%, your minimum monthly bond repayment will still be considerably less than you have been used to paying.

You would also have shortened the term of your bond by at least a year and cut interest of about R69 000 off the total cost of your home. Third, staying on a variable rate now means that you will also benefit from any further cuts the Reserve Bank might make in future.

And, finally, if you have an access-type bond, you will be able to withdraw any additional amounts you have paid into your bond account should you need them in an emergency. This is not something you will be able to do if you fix your rate now. – Berry Everitt, chief executive of the Chas Everitt International property group

One of the benefits of owning your home, instead of renting one, is that you can do anything you like with the decor. PICTURE: NATALIYA VAITKEVICH/ PEXELS