hat's better than a fixed rate?
With rampant hikes in oil prices and inflation edging up, homeowners wary of increased interest rates are asking themselves whether now would be a good time to fix their bond rates.
Home loan interest rates have fallen steadily since the end of 2002 to the current 10,5 percent "base" rate and, despite the recent decision of the Reserve Bank to leave the repo rate where it is, many economists predict there will be increases next year.
"But," says Berry Everitt, MD of the Chas Everitt International property group, "they also say that these increases will be minimal and are expected to peak at around 12,7 percent towards the end of 2007 before starting another downward curve.
"And if their predictions are on target, it begs the question whether or not it is worth fixing bond rates now, keeping in mind that banks usually peg a fixed rate at one or two percentage points above the prevailing rate for two years."
Writing in the Property Signposts newsletter, he says that at a pegged rate of, say 12,5 percent, homeowners fixing rates now stand to lose a substantial sum over the next 24 months unless the "base" rate suddenly rises more than two percentage points.
"A more profitable option would be to use the additional cash required to pay the premium on a fixed rate loan to reduce capital on the existing outstanding loan.
"For instance, the monthly instalment on a R400 000 bond at a fixed rate
of 11,5 percent would be R4264 compared to just R3996 at the current base rate
of 10,5 percent - a difference of R268 that could be paid into the existing
home loan account every month to reduce the capital portion, give the
borrower leeway to weather the small rate increases expected in the next two
years, and deliver long-term savings in interest."
New buyers, says Everitt, may want to take additional precautions against rate increases - and the simplest way is to lower potential exposure by paying bigger deposits to lower the loan amount, or to buy a less expensive property.
"Buyers who can afford, for instance, the R3996 monthly instalment on a R400 000 loan at the current "base" rate of 10,5 percent, can cushion themselves against rate increases of up to three percentage points by paying a bigger deposit and only borrowing R330 000.
"Alternatively, they could buy a cheaper property and use the spare cash to increase monthly repayments, thus reducing the outstanding capital and saving a bundle in interest."
Issued by Chas Everitt International
For further information call Brenda Smith at
Chas Everitt International Bryanston on 011 463 2033
or visit www.chaseveritt.com