With the rate of interest rising for the third – and sure not remaining – time in a row final month in March, it’s no shock that many South African owners are on the lookout for artistic methods to minimise the affect on their bond repayments.
The possibility to barter a hard and fast (slightly than prime-linked) rate of interest could be tempting in instances like these. However, Roger Lotz, franchisee for Rawson Properties Helderberg, cautions owners to think twice earlier than taking this probably pricey route.
“It’s true that costs are going to be climbing for homeowners over the next while,” he mentioned. “Rising oil, fuel and electricity prices are putting serious pressure on inflation, and costs of living are going to hit harder than usual.”
When it involves the rate of interest, nevertheless, Lotz says panic is pointless, as future will increase are unlikely to be as excessive or as quick as many concern.
“Increasing interest rates is the SARB’s primary method for containing rising inflation, but inflation isn’t the only economic ball they’re juggling right now,” mentioned Lotz. “The pandemic left our economy in crisis, and reigniting growth is of the utmost importance. Increasing interest rates too high, too fast, would be detrimental to that goal. A slow and steady rise to moderate – not extreme – levels is far more likely.”
Lotz mentioned fixing rates of interest now’s unlikely to have the cost-saving impact owners are hoping for.
“Fixed interest rates are always higher than prime-linked,” he mentioned. “That difference isn’t negligible, either – it’s often around 2%. Given that the prime lending rate is highly unlikely to escalate more than 2% over the next two years, all you’d achieve by fixing your bond rate now is to bring those increased expenses forward and pay them for longer than necessary.”
Fixed rates of interest could be helpful in sure circumstances the place reliability and predictability are extra invaluable than total value. When affordability is your final purpose, nevertheless, Lotz mentioned mounted rates of interest are nearly by no means the reply.
“Ultimately, your lender needs to make a certain amount of profit off your bond,” he mentioned. “They’re not going to offer you a fixed rate without building in enough of a buffer to ride out any foreseeable interest rate increases. The only way you stand to win with a fixed bond is if you can predict the market more accurately than your lender. That’s not very likely given the inside insights and extraordinary expertise they have on their team.”
Instead of making an attempt to dodge future rate of interest will increase, Lotz suggests owners begin planning now to verify they will accommodate the anticipated rise in prices.
“Current worst-case estimates suggest prime will reach 8.25% by the end of this year, 9.25% by the end of next year, and 10.25% by the end of 2024,” he mentioned. “It’s a good idea to run those numbers through your favourite online bond calculator to see exactly what they do to your repayments.”
If affordability is prone to grow to be a difficulty, Lotz extremely approaching your lender earlier slightly than later. Not to repair your rate of interest, however slightly to debate the total vary of other choices accessible to you.
“It’s in your lender’s best interests to help you through any temporary financial challenges,” mentioned Lotz. “That includes affordability issues caused by interest rate increases. When given enough warning, lenders are almost always willing to reach a mutually beneficial compromise that will enable you to keep servicing your bond – and keep your property – while you find your financial feet.”